Written by Shane Balkham.

For many investors, it may seem like we have had too many ‘once-in-a-generation’ events over the past few years. Brexit, COVID-19, war on Ukraine and the cost-of-living crisis to name the obvious ones. However, last week truly gave us market ructions on a scale that forced policymakers into emergency measures once again.

The week began with the Bank of England (BoE) and UK Treasury battling to calm markets after the pound hit a record low against the US dollar of $1.035, as the consequences of the Government’s mini-budget played out. There was a lot of rhetoric designed to placate markets, with the BoE announcing that it would not hesitate to change interest rates as necessary, but only after a full assessment at its next scheduled meeting.  This caused new concerns and gilt yields soared on the back of strengthened expectations of a significant rate hike at the next meeting.

The BoE’s Monetary Policy Committee was not due to meet until 3rd November, when they would publish the next Monetary Policy Report, giving guidance on inflation expectations.  However, on Wednesday the BoE intervened in the gilts market, unleashing £65 billion of quantitative easing in order to stem the meltdown in UK government debt.  The BoE’s plan is to buy long-dated bonds at a rate of £5 billion a day for the next 13 weekdays.  It also suspended the current programme of selling gilts, which was part of the effort, along with interest rate hikes, to bring inflation under control. Although UK government bond markets recovered sharply after the announcement, economists warned that the printing of new money would add to the inflationary pressures.

The International Monetary Fund added to the UK’s woes by publishing a scathing attack on the UK’s plans, urging the Government to re-evaluate proposals amid the threat of spiralling inflation. It claimed that the Government’s plan to cut taxes and invigorate economic growth is at cross-purposes with the BoE’s task of combating inflation. It now puts the central bank in a position of potentially having to move interest rates even higher than may have been planned.

The unintended consequences of the Conservatives’ strategy to boost supply-side economics by reducing the tax burden facing businesses and families, alongside a major programme of investment to stimulate and drive growth, has shaken the faith in the UK’s finances. The timing of the mini-budget could not have been worse. Politically, it provided opposition parties with ammunition to attack the new prime minister and her cabinet. Economically, it has increased the uncertainty over inflation and growth. There are also arguments that proposed policies will push out the point at which inflation will peak and result in higher interest rates.  The BoE’s remit has become increasingly more difficult.

Liz Truss now faces the devastation of her own making at the Conservative conference in Birmingham. While there has been an admission of mistakes, and a subsequent reversal of the elimination of the 45p top income tax rate, there is unlikely to be a retreat from the Prime Minister on the general direction of unfunded tax cuts.  Time will tell how successful this strategy will be.

Long-term investing is the best antidote to market fluctuations. Our studies have shown that the longer you invest for, the higher the probability of making better returns. However, it can be difficult to remain dispassionate during market turmoil and that is why we continue to provide reassurance during your investment journey. Please take time to visit our website: www.YOU-asset.co.uk/stay-invested for an educational presentation on the importance of staying invested.

An appropriately diversified portfolio will provide cushioning during the worst of times and take opportunities during the better times. While Sterling plummeted, it does mean that certain parts of your portfolio will have benefitted.  The consolation of being geographically diversified is that overseas assets are worth more when Sterling weakens.  This is the same effect we benefitted from when Brexit broke in 2016.

Last week was one of the most challenging weeks in what has been an incredibly difficult year. In volatile times, the critical message is to remain vigilant but remain true to your long-term investment plan. In turn, we will remain robust in our long-term investment processes and philosophy, adding to our track record of delivering impressive long-term returns to our clients.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 3rd October 2022.
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