April 2023 Update


April 2023 Update

The past six months have been another period of great turbulence in the world and it is difficult to be anything other than rather pessimistic about it all. Certainly, the wilting of the Truss lettuce was a serious blow to the sensibilities of this country and should remind us all that the UK is an integral part of a complex international trade and banking community – it must abide by the unwritten rules.

How refreshing then that Mr Sunak seems to recognise this. The international community breathed an audible sigh of relief and it led to a sparkling performance by the, hitherto, much-beleaguered FTSE 100 index, which rose, on a total return basis (meaning all income is reinvested) over 10% during this period, thus keeping it ahead of inflation. The only major index in the world to do so.

Bond investors, similarly, enjoyed some new found confidence in their consensus that interest rates had peaked by the start of 2023, only to find their confidence shattered by further interest rate rises from 3.5% to 4.0% in February and, thereafter, 4.25% in March. Inflation was proving to be more sticky than first thought.

It does not require a great academic brain to realise the asininity (thank you Ed Reardon) of the previously held consensus. The interest rate lever is a crude lever – it takes time for the effects of hitherto borrowing costs to filter through and central banks have the habit of over-reaching with the lever. There have been many periods in British banking history where interest rates have risen sharply – for those with long memories, I refer, of course to both 1847 (from 3% to 8%) and summer 1865 to summer 1866 (3% to 10%). Interestingly, in both these periods, rates fell back to 3w 12 months later.

There is now some evidence that higher interest rates are having the desired effect on the world’s economies and it is, now, more likely that peak rates will be seen soon. Some of that evidence was quite startling in the sudden collapse of certain banks, particularly in the US with Silicon Valley Bank (SVB). (As an aside, SVB collapsed because it was a poorly run bank with scant risk controls and did not understand interest-rate risk.)

The past few months have seen renewed weakness in investment valuations because of the most recent interest rate rises. The bout of pessimism will give way to exuberance and we shall continue to experience the heightened volatility which has been a hallmark of the present cycle.

Inflation will start to rise more slowly as the demand and supply cycle reverts to something approaching the norm. Indeed, over the past year everyone seems to have increased prices. This is a cycle that needs to be broken and it will be broken by decreased demand and/or increased supply. One would expect that as we all become accustomed to the post-Covid world the supply and demand cycle should revert to something of the past norm.

Andrew Longbon, Director
For, and on behalf of, Longbon & Company

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