- Chief Investment Officer
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Over the last two years we have experienced increasing numbers of clients looking to take stock of their finances and focus more on future financial projections to ascertain if ensure they are on track to meet their life goals. This is a perfectly natural concern when we are faced with uncertainty as has been the case with, for example, the onset of Covid and the current situation in Ukraine.
As the country continues to open up post-lockdown and the conflict in Ukraine becoming protracted, we are also left with further uncertainties that have the potential to impact our personal and corporate financial balance sheets.
Rising inflation (mainly driven by rising oil and energy prices) is now forecast to reach 10% by the year end, rising interest rates and geopolitical issues have been grabbing the headlines and will likely continue to do so. However, the economic impact, in part from Covid, has left us with the prospect of increased taxation in the years ahead.
National Insurance Contribution (NIC) rates have escalated, as have some other personal income tax rates, however many tax allowances have been frozen. As wages and asset values rise, this creates increased tax burden, effectively eroding our personal wealth and potentially impacting the ability to achieve our life goals. High inflation which is continuing to rise exacerbates this.
It is becoming increasingly important to take professional advice to ensure that your assets are performing as well as they can be and that your wealth is structured appropriately to ensure maximum tax efficiency.
That said, ultimately, for those investing for the future, a decision must be made on how and where to invest. No one can say with certainty what the future holds but it is important to have an understanding of the potential influencing factors in order to make informed decisions on how best to navigate them.
So far, 2022 has been challenging for investors. The year began with speculation around increasing inflation and the response from central banks. Investors in the UK and US are now seeing anticipated policy tightening, while further east, central banks may loosen their policies to stimulate individual economies. The political and military situation in Ukraine has led to further disruption and volatility in financial markets. Of course, the market reaction remains secondary to the humanitarian situation that continues to unfold in the country and across Eastern Europe.
Even before Russia’s actions, economies were still recovering from the pandemic at different rates. Central banks had previously stepped in, providing unparalleled levels of support to their economies. This support came after a decade of low policy rates during ‘quantitative easing’ that also supported markets. The impact of both had allowed equity markets to rise while government debt offered minimal diversification as its value had risen with little to no yield on offer. Yields have risen of late within debt markets, however increasing inflation is proving disruptive which favours an actively managed approach.
Markets are driven both by fact and speculation. The former comes in many ways with central bank statements, economic indicators and financial accounts. However speculation in markets creates uncertainty and volatility. The imposition of trade sanctions on Russia has been a catalyst, fuelling further speculation; markets fell significantly as the broader impact of the policies was digested. By far one of the most prominent beneficiaries has been the energy sector being led by the oil price. As a huge consumer of Russian energy, Europe is looking to reduce its reliance on Russia into new alternatives and new sources of oil and gas.
Like many investment managers we have reviewed our portfolios to gauge our Russian exposure. Russian debt or equity has never been a core allocation and any exposure has been held within any externally managed portfolios. Going into the crisis our exposure was extremely small. Looking forward, it is unlikely that any Russian exposure will be introduced as the package of sanctions continues to increase and due to the regulatory scrutiny required.
The cost of living crisis in the UK is a hugely emotive subject. Inflationary pressures are increasing, and the Monetary Policy Committee (MPC) is mandated to control inflation. With huge debt left over from the pandemic the UK Government is looking to raise revenue to manage this burden. Consumers are facing a real squeeze as wage inflation is eroded through National Insurance increases in April, distortion in energy markets as utility prices rise, fuel prices at the pump remain elevated and now interest rate rises from the MPC.
We have been working closely with our underlying fund managers in order to fully understand their perspective and approach. Within ASAM we don’t aim to position our portfolios for geopolitical events, we favour long term opportunities. Our underweight allocation to the resource-rich FTSE 100 has proven to be detrimental for performance in the short term. We have chosen not to chase the market by increasing the resource exposure as this remains a volatile sector often driven by sentiment.
We continue to look ahead and seek to invest in opportunities that are financially robust with the ability to absorb future rate increases by example. Global markets will continue to fluctuate but they’re not uninvest-able. Recently, corporate dividend levels have remained supportive reflecting corporate strength. Markets have risen from the lows as they did in March 2020 following the initial Covid outbreak. The recovery in equity markets and their ability to absorb so much information is encouraging albeit the volatility has increased. Within fixed income markets, we favour more flexible strategies as policy rates fluctuate.
The cost of living crisis is becoming more politically sensitive in the UK. The Chancellor provided some respite with a reduction in fuel duty and an increase in the threshold at which National Insurance is paid. The level of comment and analysis remains unparalleled with the impact of energy prices rising coupled with National Insurance increases. The Office for Budget Responsibility has suggested that living standards are falling in the UK faster than at any time since the 1950s. While we are several years away from the next General Election, the Chancellor’s promise of lower rates of income tax by then may be seen as of little comfort today.
In conclusion, it is important to grasp that while there are many challenges ahead, there have always been, and likely always will be, challenges impacting financial markets. There will be, as ever, opportunities to seize across the financial markets which we believe can be capitalised on over the longer term through the robust research and analysis afforded by investment professionals.
If you have questions about your own personal finance, or in relation to any of the issues raised above, please contact Graham Clark or your dedicated ASAM Financial Adviser, who will be happy to discuss your queries in more detail.