By Jonathan Unwin,Vice-head of advisory and asset management Banque Havilland
2022 is likely to be the most challenging year for savers or investors in over a decade. With a triumvirate of high inflation, low interest rates, and volatile capital market volatility, there is no easy method to allocate liquid wealth.
With official inflation in the UK at 5.5% (consistently higher than economists expect) and the current bank saving rate of 0.75%, any cash deposit will begin to lose its purchasing power over time. Despite its guaranteed fall in real value, cash is still more appealing than the bonds market. This is because of the fixed nature of the income stream from asset classes, set against a backdrop that sees central banks raising interest rates to combat post-pandemic inflation.
After decades of compression, bond yields have begun to rise. There is a risk of a very negative total return for a basket of sterling-backed bonds. As central bank support is cut off and the Bank of England increases base rates, the potential for extremely negative total returns is great. A passive allocation to the stock exchange is becoming unwise due to the increase in bond yields.
A generic holding in a market tracking index fund has proven to be a great strategy. It is inexpensive, easy to invest in, requires minimal follow-up attention, and provides double-digit returns (for a standard ETF). The main drivers of these returns have been, as we all know, the mega-tech growth stock, which some of them are already very profitable businesses and others which are the stocks that will be the most profitable in the future but are yet to break even.
Both stock sets share the promise that future cash flows will be high, but with a high valuation. As bond yields rise, the relative value of these cash flows decreases. This is why we have seen aggressive selling in recent months of long-term growth equities. A passive, global index tracker won’t be as attractive as it once was and will require a more nuanced, targeted approach.
Rising inflation will affect property, which was long the preferred investment choice in Britain, as the Bank of England is forced to raise interest rates. The rising cost of living may not directly affect those with high net worth, but it will make saving for a deposit more difficult and mortgages more expensive for those who aren’t prepared for higher rates. This could have a downward effect on the housing markets, meaning that prices may not keep up to inflation.
At Banque HavillandWe always recommend multi-asset portfolios, which are liquid and multi-asset, to our clients. These portfolios can be customized starting at 5 million. A global, selective approach that is able fully to avoid the frothy parts and an equity-dominated allocation will continue to be the best way to ride out current conditions.
For example, a strong focus on mining and banking stocks can help the UK market to benefit from higher interest and commodity prices. In contrast, domestic Japanese stocks do not face the inflationary pressures of other developed countries.
In addition to a carefully selected equity allocation, we are skilled in identifying uncorrelated strategies and funds that offset normal market risks, such as commodities and precious metals. Our portfolios are designed for long-term success but can be liquidated at any time. This, combined with the agility of a small, boutique bank allows us to make quick decisions in the event of a change in the environment, allows us to invest quickly.
In an inflationary, rising rate world, it is best to use cash in a flexible and confident manner.
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