On the 23rd March the Bank of England raised interest rates to 4.25%, making it the 11th consecutive rate hike. This was against speculation that rates may not rise this time, considering the turmoil in the banking sector, caused by the collapse of Silicon Valley Bank and Credit Suisse.
So, this recent rate rise means that the Bank of England has put a higher priority on tackling inflation but made comment that they will remain “vigilant” to further issues in the banking sector.
The collapse of SVB and Credit Suisse was a crisis not foreseen and this gave the Bank of England additional consideration regarding the sector.
With the Governor of the Bank, Andrew Bailey informing MPs that while the bank remained on high alert, he does not think that we are in the same place as in 2007. Since then, we have seen the UK banking sector in a more cautionary recovery with the European banks.
So, for now the higher temperature of consumer prices in February (CPI Inflation accelerating to 10.4%), and the tight labour market are cause for concern. This is amid worries that inflation could still become embedded in the UK economy, with inflation for February forecast to be 9.9%.
Currently, we are seeing energy prices falling, which will help stop inflation running out of control. However, although inflation is starting to fall in Europe and the US, it is proving harder to control in the UK. Here, the higher-than-normal energy prices, wages, core goods and services trending up and the weak pound has been keeping core inflation figures high. The Bank of England has however stated that they expect inflation to fall sharply over the coming months, which could mean the rate hikes are coming to an end.
2022 was indeed a torrid year, in which bond funds fell in tandem with equities, yet yields effectively doubled, and the attraction is increasing. But while many commentators suggest that 2023 will be the year of fixed income – are strategic bond funds the best way to access the asset class? Is it time to increase exposure to the fixed income market this year?
High inflation and rising interest rates have put markets in a volatile state, making investors nervous, with some taking a cautionary stance, by locking in a set income yield now as more attractive than taking a risk with equities. However, investors often forget that bond returns are limited to yield at purchase, if held to maturity and the bond doesn’t default, that is the return you will get and no more. Of course, having a guaranteed yield is attractive in the short term, accepting a set rate now can put investors at a disadvantage, because there is no opportunity for future growth rate.
Fixed income is “fixed”, whereas dividends get paid out of nominal corporate cash flows that grow over time in line or above the level of inflation.
Investment trusts focussing on companies, that have good positive cash flows which can increase dividends over time could prove fruitful.
If you would like to discuss your current investments or future plans we would be happy to schedule a call – Contact details for the CFM team are here and my contact details are:
T: 0203 6970561.
Stephen Lovelock, May 2023