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Weekend of 2/3 October 2021

 

Seasonal anxiety

Autumn is getting underway, and we are entering a period of the year during which investors are sometimes prone to anxiety. To make matters worse this year, the news is brimming with negative stories about the financial markets, which will only add to their anxiety and increase market volatility. At such times, exercising some prudence is often the most sensible course of action.

Bond markets are fretting

Signals that the US Central Bank might soon start tapering its monthly bond-buying programme and hiking interest rates earlier than expected have spooked the bond markets in recent trading sessions.

And as if that were not enough, those same bond markets have also been impacted by the continued rise in inflation. Just how long will this period of higher inflation last? Will it really be as short-lived as has been claimed? Or are we in for an extended period of it? Fed chairman Jerome Powell still expects inflation to ease eventually, although he readily admits that the current inflationary pressures are “frustrating”. All of this has led to the current yield on the US 10-year Treasury note (a key benchmark for global borrowing costs) ticking up to 1.53% – significantly higher than it was at the start of this year.

Inflation jitters

Given that the rate of inflation is still rising and that global economic growth is starting to slow, could it be that we are heading for a period of stagflation? 

It’s worth remembering that stagflation is considered worse than a recession: it combines all the negative economic effects of a recession (such as stock market declines, higher levels of unemployment and possibly a dip in the housing market) with inflationary pressures and higher consumer prices. We are already seeing signs of this happening – the price of crude oil is rising rapidly, as well as the costs of a number of other important everyday items.

At the same time, suggestions that corporate and personal taxes will need to be raised in order to fund those promised public spending programmes – all essential for getting the world back on track and reducing the burden of the global government debt mountain – is also a source of concern for consumers. Governments and central banks are doing their best to try and mitigate the problems caused by the pandemic. But the fact still remains that the world has spent an enormous amount of time in lockdown – time during which we ceased normal operation and people’s lives were turned upside down by the virus, together with the redundancies, furloughing and fatalities that it brought with it.

What’s pushing prices up?

The world is in the process of trying to reopen for business. This has caused a demand-over-supply conundrum which is placing further pressure on day-to-day living for many people and businesses. This is also what is driving the rising costs and creating transportation difficulties globally.

In such scenarios, consumers need to manage their finances more carefully and ensure that their overall spending does not exceed their income. Price increases and decreasing wages mean thin margins, disproportionately squeezing people on lower incomes and creating further problems.

A well-diversified portfolio

As far as your investments are concerned during periods of inflation, recession or stagflation, outcomes can be difficult to predict, but a well diversified portfolio with companies that have pricing power and rising dividends are more certain to deliver positive long-term results.

Many of our existing strategies currently include asset allocations that embrace high-quality global consumer brands with pricing power and a number of important sectors, such as disruptive technologies, biotechnology and healthcare, industrials and commodities… as well as alternative assets, such as infrastructure, smart materials for clean energy and other real assets.

A number of our strategies also have inflation protection outside the equity markets through an asset allocation to inflation linked bonds.

Furthermore, our internal sustainable screening process is providing us with some very useful insights into those corporations that are significantly changing their business models to create a much cleaner and safer world.

Our approach is to simply to capture the world of tomorrow – not the world of the past. When it comes to investing, there are always going to be bumps in the road. Nevertheless, we continue to believe that great businesses will deliver sensible and consistent returns over the long term.

Needless to say, having a-well-thought-out long-term financial plan will ensure that your finances are protected whatever the economic outlook. It goes without saying – but it is always good to have a reminder – that regular meetings with your dedicated wealth manager or financial planner will help make sure that you are indeed on the right financial track.


Peter Lowman is IQ’s Chief Investment Officer. He brings to IQ over 40 years of experience in getting client portfolios to perform outstandingly. Peter is relentlessly focused on building and honing IQ’s bespoke investment portfolios, and as a long-standing member of the Chartered Institute for Securities & Investment, his expertise is regularly sought by the investment press.


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