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Rory McPherson is Wren Sterling Group’s new Chief Investment Officer. He joined us in September this year and previously worked at Punter Southall Wealth as their Head of Investment Strategy. Following Wren Sterling Group’s acquisition of Mutual Financial Management LLP and its sister company, Magnus, we now have permissions to run our own discretionary managed funds, which Rory will oversee.
In this article, Rory reflects on what happened in the markets and sees reason to be optimistic.
Three phrases I’ve said a fair bit since starting at Wren Sterling in early September. A short time that’s witnessed two Monarchs, two (soon to be 3!) Prime Ministers and three Chancellors. Chaos has extended beyond British politics and found its way into global markets, with September seeing both bond and equity markets enter bear market (when a market experiences prolonged price declines, characterised here by a 20% fall from recent highs territory), with global bond markets on track for their worst year since 1949 and having their first bear market in over 70 years.
“Bear with me” prefixed many of my early conversations with colleagues, as I stumbled around Wren Sterling, familiarising myself with its systems and processes or asked our ever-patient IT manager Shaun my fifth question on any given day. It also speaks to the state that financial markets find themselves in, with the bulk of the falls having happened in September.
The bear market for financial markets really came home to roost in September, with UK bond markets falling by over 8% in the month alone and Global equities falling by over 9%. The painful drop in September has (at time of writing on 20th October 2022), equity markets down by some 22% in US Dollar terms for the year-to-date and bond markets (as measured by the UK government bond index) down by some 26.5% YTD.
Falls in equity markets, though not pleasant, are much more commonplace. Over the course of the last decade, the global stock market has gone up by 150%, yet has had 4 falls of 20% or more.Disclaimer: chart shows the return of the MSCI World in local currency.
Data source: Bloomberg. The horizontal axis shows dates and the vertical axis shows return.These sorts of falls, though not pleasant, are part of the parcel of investing in buying a stake in a company and exposing oneself to the roller coaster ride that is capitalism. Also, although equity holders are not rolling around in clover this year, they have generally benefited from the weakness of the Pound. The Pound has been roundly trounced this year (it is down about 17% vs the Dollar at time of writing) thanks to multiple political U-turns and questionable fiscal policy. Whilst it’s asking too much for equity holders to be thankful for this weakness, it has at least cushioned their overseas share-holdings and also holdings in the larger domestic companies. The FTSE 100 which derives the majority of its earnings from overseas (along with benefiting from a c.25% allocation to the Energy and Materials sectors which have been amongst the best performers this year), whilst down c.7% for the year, has avoided much of the pain.
Bond markets on the other hand (with the promise of a fixed rate of return) have historically been much lower risk investments and the speed of their unwind has been much more distressing for many investors. Higher inflation and higher interest rates are typically bad news for bond holders and the aggressive ratcheting up in interest rates by Central Banks has put enormous pressure on these investments. High inflation has played a big part of the unwind here, but a reluctance to raise rates initially (interest rates were still at zero or thereabouts this time last year whilst inflation was well above target) meant for a more hasty, more agonising catch-up.
Our own Bank of England and politicians have copped much of the flack at home, but we should not play down the role of their counterparts in the US. Afterall, it was only in November last year where the US Federal Reserve, complete with its 400 PhDs (cynics would argue 400 too many!), retired their use of the word “transitory” when referring to inflation (i.e. they acknowledged it was sticking around for a bit). UK bond markets have perhaps been the most skittish (with confidence being called into question over some of the Government actions), but all corners of the bond market have felt the pain of higher interest rates and higher inflation.
Which brings me to “don’t panic”. While such losses are painful to endure, staying invested allows one to participate in the rebounds which are often at their strongest after a heavy sell-off. Sadly, there’s no magic formula to this and I can’t tell you what the next five weeks or indeed five months might hold – anyone that claims they can should be viewed with suspicion!
However, I can look at valuations today and say with good confidence that I haven’t been as excited about future returns for government bonds in over 15 years and that equity markets now look decent value; having been extremely expensive this time last year. Reaching your destination requires you to stay on the road and not panic. “Keeping at it” and sticking with your investment plan allows you to reach your financial objectives.
I expect we’ve a difficult winter ahead, with inflation likely to remain high and the Central Banks in restrictive mode. “Keeping at it” has become a popular watch word (for those of us sad enough to watch his press conferences!) for the US Federal Reserve Chair Jerome Powell; signalling his intent to fight off inflation. It echoes a phrase used by Paul Volcker in the early 1980s who is admired by Powell as someone who successfully tamed high inflation.
This suggests that any intervention by our own Bank of England (like their recent one to shore up our bond market) is unlikely to prompt widescale action and that the cavalry (in the form of rate cuts by the US Fed which tend to prompt markets to rally) won’t come to the rescue. However, due to the health of US banks, the strength of US corporates and the resilience of the US consumer, any US recession should be short-lived and hence we should be able to look to the World’s largest economy to pull us through.
If you’ve made it this far then I thank you for “bearing with me”. I know these are challenging times for investors, but I’d urge you to keep with it and not to panic. Although parts of the world look fairly bleak today, it’s important to remember that investment markets are forward looking and tend to move very quickly in anticipation of better days ahead. Our job as investors is not to panic and not to miss out on those opportunities as confidence returns.Disclaimer: chart shows the UK 10 year bond yield. Data source: Bloomberg. The horizontal axis shows dates and the vertical axis shows the yield.This article does not constitute personalised advice. The value of your investments can go down as well as up, so you could get back less than you invested.
