No end in sight

Markets can see no end in sight to the widening effects of the Middle East war, and are moving lower. This is not entirely surprising given that neither side in this conflict seems able to behave predictably, and the eventual outcome is therefore impossible to either judge or time. However, what we do know is that unless we see a rapid de-escalation, corporate and personal spending decisions will be delayed, we will in all likelihood see hoarding of fuel, food and basic household items placing further upward pressure on prices, economic growth forecasts be slashed and job losses accelerate.

Before the 28th February there was a range of potential issues to worry investors, but despite specific concerns related to stubborn inflation and unsustainable government borrowing, there was little to suggest that these 'known unknowns' provided imminent danger of sudden economic or market collapse. Commentators were pointing to AI providing the productivity boost of a second industrial revolution that could offset inflationary pressures elsewhere. All of this changed in one day when a dramatic shock was applied to the price and supply of energy and therefore to the global economic outlook. These periods are unsettling, and in this case made more so by investor's inability to apply rational assumptions to the behaviour of the protagonists.

Against this background one might have hoped to see falls in interest rates to boost consumption and confidence, but we are seeing the exact opposite, with very sharp rises in long term bond yields and a growing assumption that short term rates are unlikely to fall any time soon - and the spike in inflation might even cause the next move to be upwards. In the short term, these dynamics are pulling the rug out from asset valuations, base and precious metals in particular, because if the ‘risk free’ rate of return from cash goes up, the opportunity cost of owning non yielding assets such as gold rises. Moreover, given previous price rises, there are profits to be taken to offset losses elsewhere, and where Gulf States cannot sell oil, they are forced to liquidate other assets such as reserves of gold to meet spending commitments.

There is a certain irony that circumstances that increase uncertainty, drive up inflation, require greater government support, spending and deficits, do not immediately lead to a flight into the ‘hard assets’ that cannot be printed and are protected from being undermined by inflation. The immediate reaction has been quite the opposite - a headlong rush into the liquidity of higher yielding dollars. So, does this change our longer-term assumptions and the need to protect our savings from the effects of unsustainable government borrowing and money printing? No, if anything, recent events reinforce these concerns, but until the energy crisis subsides, interest rate expectations will remain elevated, and the uncertain outlook will continue to attract investors to liquidity and high yields.

These are times when our yielding investments provide some insulation from the requirement to raise liquidity through sales while providing the ability to reinvest income at lower market levels. Moreover, our early entries into the precious metals and some profit taking in January offer the additional comfort of significant book profits on our holdings, albeit substantially lower than those on 28th February.

About the author 

Jo Welman had a career in the City spanning 45 years and worked in a wide variety of financial sectors. After graduating from Exeter University in 1979 with a degree in economics, Jo spent ten years at Baring Asset Management where he managed a range of UK and US pension funds and unit trusts, investing across multiple sectors including bonds, international equities, commercial and residential property and private equity.

In 1989 Jo became Managing Director of merchant bank Rea Brothers’ institutional and private wealth investment management division. Over the following decade Jo launched a series of specialist investment trusts and funds in a variety of industry and property sectors, before forming a joint venture with reinsurance broker Benfields (now Aon Benfield) and raising one of the first limited liability corporate capital vehicles for the Lloyds insurance market in 1993. As part of his long-standing involvement in the insurance industry, Jo co-founded the Benfield Re-Insurance Investment Trust plc (Brit) in 1995. Following the sale of Rea to Close Brothers in 1999 Jo became Chairman of Brit Insurance Holdings Plc and in 2001, in partnership with Brit and Benfields, he co-founded specialist asset management firm, EPIC Investment Partners (EPIC).

Jo continues to provide corporate finance and investment advice to entrepreneurs and private investors. He sits on the board as a non-executive director of ARK Syndicate Underwriting.

“Feet up by the pool”

Jo does not receive any remuneration for his EPIC commentary. Instead, EPIC is pleased to promote the latest edition of his book “Feet up by the pool”.

Profits from sales of the book go to The Money Charity, a charity that shares Jo’s objective to help fill in some of the worrying gaps in the school curriculum. These omissions leave many young adults lacking in the financial awareness that they need to survive in a world where they will rely on their own savings if they are ever to stop working. Even if they earn the right to a full State Pension, today this amount hardly covers council tax and utility bills, and so they need to save and build up a sum of capital amounting to around twenty times their desired retirement income. A frightening number.

As Jo eloquently says, “If we can do our bit to raise awareness of the impending UK saving and pensions crisis, the exercise will have been worthwhile.”