Having experienced everything bar the kitchen sink being thrown at the 2022 economic markets, we’ve all been peaking around the corner to see if 2023 could bring a smile to forlorn faces.
Investors can’t be criticised for thinking that they deserve some respite. And although there was a stark reminder in March of the 2008 banking collapse with the Silicon Valley Bank (SVB) and Credit Suisse crisis – the first quarter performance of stock market investment showed signs of positivity, which means investors might just get what they’ve been hoping for – but it will require long-term resilience.
Is UK inflation coming down?
There are indications that inflation has started to slowly come down. UK inflation dropped slightly from the 2022 figure of 10.7% to 10.4% in February, while the Eurozone and the US were holding their inflation figures at 6.9% and 6.0% respectively.
These were the ‘headline inflation’ figures, however inflation is in fact made up two components – core and non-core – and to recognise how inflation impacts on investing, it’s important to understand the difference.
Headline inflation: "The most common type of inflation that we are quoted through the news is headline inflation. The current headline measure of inflation in the UK is the Consumer Price Index (CPI). This shows the changing cost of a basket of goods and services for a representative household.” (The Private Office, 2022).
What's the difference between core and non-core inflation?
Non-core inflation considers sensitive elements such as food and energy prices which fluctuate rapidly. Core inflation excludes food and energy prices with a view on more consistent price movements – such as wages, productivity and long-term supply and demand imbalances. It is these core costs that central banks will use when setting their monetary policy for the long term.
So, until we have a better predictability of the non-core elements, investors should continue to take a cautious approach going forward. The current headline inflation rates reducing can be largely attributable to declines in energy prices. Whereas core inflation tends to be much more ‘sticky’ than non-core as it is embedded in the mindsets of the economy, and therefore it will take longer to eradicate.
With this in mind, The International Monetary Fund (IMF) has issued a favourable forecast suggesting a positive outlook with a 2023 year-end figure for UK inflation of 5.9%.
Will the Bank of England continue to increase interest rates?
It’s widely expected that interest rates will continue to increase until mid-2023 and will remain high until mid-2024, before potentially coming down again. Central banks are extremely sensitive to inflationary pressures and the impact on their respective economies, so we can expect them to continue using interest rates to reduce this pressure. In the first quarter the Bank of England raised interest rates to 4.25%.
Will the UK enter a recession this year?
It was believed that at the end of 2022 the UK would enter a recession. However, end of March figures showed small economic growth of 0.1% (rather than the expected 0.2% fall). Avoiding recession is news we all needed to hear, however the IMF believes that the UK will still be the worst performing economy of all developed countries in 2023 – shrinking by 0.6%.
Q1 2023 asset class performances
Overall, this quarter has cautiously continued to build on the recovery seen in the financial markets in the final quarter 2022. Investors began to feel more positive at the beginning of January as there seemed to be hope the equity and bond markets would rally because of both declining inflation and potential loosening of monetary policy. However by February the markets were reminded of the many global fiscal challenges that continue to impede growth.
Let’s take a look the performance of key asset classes built into the OpenMoney portfolios…
On the world stage there has been optimism with a small but significant return of 4.42% in global equities. Even with emerging markets, there was a feeling that with China abandoning its zero-Covid policy, the country’s economy will be on an upward trajectory. However, this trajectory was limited to 1.87% over the quarter.
During the quarter value stocks suffered a large reversal from where they were in 2022, with a negative -1.51% return in the first quarter. This performance coincides with the follow on impacts of the Silicon Valley Bank collapse mentioned prior.
During the same period, growth stocks saw a 10.70% return. Growth stocks are akin to businesses that are expected to generate higher levels of future cash. These companies often invest in research and development and other expansion initiatives. So, when interest rates are expected to fall, this leads to increased value of future cashflows which make them more attractive to investors.
Bonds are often used as a ‘defence’ investment because traditionally there is an inverse relationship between bonds and equities which means when the equity market drops, the bond values rise. In 2022 this relationship did not always hold true, however in the first quarter it seemed to be restored as global bonds returned 2.82% and the UK bonds grew 2.22%.
Global property continues to struggle returning a negative -4.36% in the first quarter. Once again, interest rates are the biggest challenge for property investors.
OpenMoney portfolios are geared to a globally diversified market capitalization approach and are well placed to take advantage of potential growth here in the UK and in the global markets.
From January to March 2023 the OpenMoney portfolios gained positive performance with Portfolio 3 returning 2.57% and Portfolio 2 retuning 2.15%. Portfolio 1 returned 1.94% which broadly reflects what has been seen in the overall bond market.
OpenMoney cumulative portfolio performance as of 31 March 2023
Your investment commitment should be long-term – at minimum 5 years – no matter which portfolio you are invested in. The markets are awaiting positive news regarding interest rates and when that does occur you could potentially see a strong rally.
If you are seeking ongoing investment advice for your individual circumstances, our investors can contact OpenMoney financial advisers for questions or concerns for no additional cost.
When you invest, your capital is at risk and there’s a chance you may get back less than you put in.
Source: Timeline Portfolios (formerly Betafolio Ltd), 2023.