Investment Committe Report March 2023
March 2023
Introduction
Last month we focused on the risks of recession, looking at the United States as it is often the precursor for economic downturns in other countries.
Since then then we have now seen the collapse, and rescue, of Silicon Valley Bank and Credit Suisse that has put further stress on financial system. This month we are going to take a closer look at the United Kingdom as well as revisiting developments in the United States.
Key Factors to Watch
When we look at key indicators for the UK the economic condition remains weak -
- GDP growth has been flat from 2022,
- Double digit inflation that remains stubbornly high,
- Business production costs and wage bills are increasing,
- Industrial Production & Manufacturing is flat,
- Business new orders are falling and inventories rising,
- Business sentiment indicators remain weak,
- Consumer confidence is rising but remains at a 20 year low,
- Real earnings growth has been negative for over 16 months,
- Interest rates have been rising increasing costs to borrowers,
- House prices are declining.
If both businesses and consumers are being squeezed facing rising costs and falling income, the result will be a “belt tightening” exercise for both and a decline in productivity and spending that will impact future economic growth.
We must also then add in the role of the Bank of England and their fight to keep inflation down; at the recent Monetary Policy Committee Meeting that raised interest rates by 0.25% and has consistently reiterated their commitment to fighting inflation and Andrew Bailey the Governor has again stated that further monetary tightening would be required if inflationary pressures remained[1].
Central Banks need to act, or be seen to be acting, to curb inflation but they are also on a knifes edge as not only do higher rates for longer increase the likelihood of a deeper economic downturn but the implications for the stability of the banking sector are significant.
The failure and subsequent bailout of Silicon Valley Bank (SVB) in the US was caused by two simple problems outlined in Mauldin Economics[2].
- It did not have a diverse customer base to balance its assets and liabilities – most of the depositors came from a small group of venture capital firms that recommended the start up firms they funded deposit cash at SVB. When the firms left SVB it did not have the liquidity to pay them all the cash they wanted.
- Whilst SVB didn’t have cash it did have a lot of US Treasuries that it bought from the deposits received; whilst this type of investment is considered low risk the US Federal Reserve raising interest rates meant the value of these Treasuries fell substantially and then had to be sold at a loss.
This risk to the economy and the risk to the banking system leaves Central Banks on a knife edge when it comes to decisions on interest rates.
Whilst our next section looks at how we are positioning portfolios to deal with the risks outlined here is an interesting fact from the United State highlighted in the Felder Report[3]
“Bloomberg reports, “The fear of missing out on the next big rally is leading to a replay of the dip-buying impetus during the 2020 bull run.” Of course, the major difference between 2020 and today was that back then the Fed was just embarking on a massive money printing program; today, the money printer is operating in reverse.
The result of all of this dip buying is that, ‘As of yesterday, the combination of Apple, Nvidia, Microsoft, Meta, Tesla, Amazon, Alphabet, Salesforce and AMD have contributed ~160% of the S&P 500’s gains on the year (so it would be negative without these stocks)… Apple, Nvidia and Microsoft alone have contributed 91%,…
Aside from the fact that market breadth this narrow is totally uncharacteristic of a new bull market, investors looking through the windshield rather than the rear-view will notice that the road ahead for these few companies looks nothing like the road behind……In short, this is not a normal cycle; this is what it looks like when a bubble bursts.”
Investment Strategy
There has been no significant changes to our outlook or strategy, that can be summarised as follows.
- Retain high cash balances as interest rates on investable cash have increased.
- Gold remains in a strong uptrend and provides protection against market volatility. If this continues holdings in Gold Mining Stocks will benefit as well.
- Long term there is a strong case for commodities rising from historically low levels, but in the near-term recessionary pressures and economic slowdown make them less attractive than they were last year.
- Holdings within Multi-Asset to be retain as they offer diversification and consistency in difficult market conditions because of their flexible investment strategies.
- Selected equity holdings to remain in place, but this will likely be less than 25% of total portfolio values.
- Should we be convinced that interest rates have reached somewhere near their peak we will be recommending US Treasuries and UK Gilts that would perform well in a recession.
[1] BoE’s Governor Says Rate-Setters Can Put Inflation Before Bank Worries – Business Recorder 29-3-23
[2] Another Unstable Finger - Mauldin Economics 17-3-23
[3] Desperately Yearning For A Return Of The Old Paradigm – The Felder Report 31-3-23