As a result the TCFP Model Portfolio will remain unchanged.
Here are brief notes of our discussion:
Politics
The political situation here, over the pond and across the channel is broadly stable. No elections are due for quite some time.
The geopolitical situation is anyone’s guess. Our two guesses are the Ukraine war does not end this year. Russia is slowly losing and still occupies Ukrainian territory giving Ukraine no reason to sue for peace.
Our other guess is that if China was going to invade Taiwan it would have done so already.
We do not believe the situation in Brazil amounts to much, but we will keep an eye on it.
Interest Rates
In the US interest rates are expected to peak at a lower level (4.75%) than previously anticipated. That peak will be sometime later this year.
It is a similar story in the UK.
How quickly they come back down from their peaks depends on where inflation settles. And that is dependent on what wage demands are met or not. Wage demands are reducing in the US.
It will be a long time before ultra low interest rates return given what we can see. What we can never see (without the benefit of hindsight) are “black swan” / “out of nowhere” crises. Recently they have prompted a rapid reduction in interest rates.
There could be one round the corner, there may not be one for years. We simply can’t know – there are no facts about the future.
Inflation
Inflation in the US has peaked and should come down steadily this year. It is probably the same for the UK.
Inflation is expected to be stickier in the UK than the US.
The market expects inflation to settle around 3%, above that figure is an ongoing issue, below that figure is fine.
Tamed it is not, in retreat it is.
GDP
We have no doubt that output is falling across the developed world – the usual measure of a recession – but it is more nuanced than that.
Can we be in recession when most people still have jobs? We don’t think so regardless of what the GDP figures say.
That said the market expects both lower inflation and higher unemployment. We wait with bated breath. Shocking GDP and earnings figures will most likely shock the markets.
China says it is still growing, but they would say that wouldn’t they? The alternative is being shot.
Expected investment returns
In the short-term we see bond returns trickling lower as interest rates rise. We expect equities to trundle along.
However, with a major shock, bonds could climb and equities fall. That shock could be the recession being much worse than expected, which is well within the realms of possibility.
We expect positive, if not exciting, returns this year. And a whole load less drama for both bonds and equities.
Long-term (5-7-10 years) we expect the full economic cycle to have completed. With the usual mix of great, meh and poor years producing an average return of around 6% pa.
Or, put another way, regardless of the short-term distractions, the long-term prognosis remains very good – there is no need to fear not getting the returns you expect as long as we stick to the plan.
TCFP Model Portfolio
Still no changes.
We looked at the relative performance of bonds and equities. They have not gone in different directions to the extent that we would change their mix. Looking forward, given our expectations this year, we are comfortable maintaining the current mix until something substantial happens.
It is a similar story looking at the large / small / emerging markets mix. Over the last 12 months they took different (but not that divergent) paths to end the year in the same place. Therefore there is no impetus to change this mix either.
Remember we want good evidence and a compelling story that any change is very likely to produce a better outcome than not changing. When neither exists we are reduced to crystal ball gazing which is not the way to run an investment strategy.
One thing now on our radar are High Yield Bonds (a.k.a. Junk Bonds). They are starting to look like they might be good value compared to Government bonds. Good value means that the additional return they promise over and above Government bonds is sufficient to offset the additional risk of owning them.
For several years the difference has been nowhere near enough. It is just below not enough at the moment. With a market shock here and there they may enter “quite attractive” territory.
If they do then we are imagining selling some Government bonds and some equities to arrive at a 15-20% holding. We would hope to lock in a yield of 6% pa which would be 2-3% above the Government bond yield and promise the potential for capital growth as interest rates start to come down.
We are not there yet, but it is very much on our radar.
And that concluded January’s meeting. The next meeting will be in April, or sooner if needs be.