Gower Pension Schemes, Member Briefing - December 2023

‘Skate to where you think the puck is going’.

For much of 2023, the reasoning and rationale around investment markets, their movements, and performance, may have seemed like endlessly peeling an onion. When one headwind absorbed and understood, another appears; when one market consequence is digested, a further economic challenge emerges. Uncertain politics also feature prominently, with UK and US elections looming and with them, a high probability of a change in government, at least for Britain in 2024.

We never seem far from challenge or trauma as the broader economy is constantly buffeted by exogeneous events.  Some have a seismic human cost as the tragic events in Gaza join those of Ukraine. All other market and economic activities seem far more mundane alongside such humanitarian crises, but they all nonetheless come with consequences.

The message this sends to the investment world is an uncomfortable one. Whether it is due to investor concern over continued cost of living pressures, higher inflation and the aggressive rise in UK and international interest rates, all these issues combine and have been felt in the form of significant outflows from investment funds globally.

There are of course positives given that US and UK headline inflation rates fell sharply in October. The news came as a welcome surprise, particularly for the UK government, allowing it to claim that it has made good on its pledge to halve inflation. This said, the sharp fall in UK inflation was in large part a known quantity, as Ofgem’s 2022 energy price cap rolled out of the calculation.

Nonetheless, we hope that inflation is now genuinely weakening and that this will ease the cost burdens that have increased rapidly over recent times. A further positive for some will be the return of ‘real’ or ‘positive’ interest rates. The Consumer Price Index (CPI) is now reported as 4.6% while the Bank of England (BOE) rate sits at 5.25%. We therefore now have 0.65% positive differential which has not been seen in any meaningful way for some years.

Whilst this offers some comfort, I feel this situation also poses danger and illusion. It seems there is now a high probability that rates will likely move sideways or downwards from this point, while core inflation remains stubborn. For medium to long term pension savers, risk assets remain the focus as investment markets re-emerge as a key source of inflation-beating growth.  

Whilst the state of national and indeed local public finances remain a concern, the UK government’s Autumn Statement has arguably captured the right balance for the circumstances and uncertainty ahead, whilst being able to announce some personal and business tax cuts.

Recent years have left the profession of financial forecasting more embarrassed than normal. I fear the Bank of England has given up on its own projection data with many central banks now adopting a reactive rather than pro-active, or pre-emptive approach.

I make this point as I am now more frequently asked by clients when rate cuts will come to fruition. The answer can be summarised as follows: only when the actual economic data suggests it or is bad enough to prompt it. This is why some feel the speed and aggression of rate rises may ultimately prove problematic. Having narrowly avoided recession thus far, the UK may not duck this fate in 2024.

While the theme of ‘higher for longer’ is well applied domestically, it appears that the US Federal Reserve will likely cut rates sooner and to a greater degree. The improvements seen within financial markets over recent weeks are certainly suggestive of this with the Dow Jones Industrial Average (DJIA) at a record high for 2023. To borrow a little American vernacular, markets tend to ‘skate to where they think the puck is going’. In other words, they make an early judgement that factors-in future events into current asset prices.

Headwinds and challenges continue, whether they come in the form of further escalation in the Middle East and an upward shift in energy prices as a consequence, or other as yet unforeseen developments. Numerous factors could of course reignite inflationary pressures and invite potential reversals of progress seen thus far in recent weeks for financial markets.

A key doctrine of investing is that ‘diversification in our planning is essential’. Given the times we move through this is never more important, as are review and discussion to ensure all underlying financial planning is relevant and reflective of our clients’ aims.

The team at Gower are always available to review and examine current planning or help formulate new strategies as we move forward. In closing, I wish all pension members and clients the compliments of the season and best wishes for 2024.

Disclaimer

Past performance is not a guide to future returns. Please note that the value of your investments can go down as well as up and you could get back less than your original investment.

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