The TCFP investment committee met yesterday to discuss the current economic, political and investment environment.
As a result the TCFP Model Portfolio will remain unchanged.
Here are brief notes of our discussion:
Politics
It is rather as you were, there is not much going on, or on the horizon, which affects our economic expectations.
Globally speaking the direction of travel is an ever-larger State apparently responsible for everything, all the time.
We see no new thinking on this front and therefore much-needed, meaningful economic reform is not in the offing.
Interest Rates
We can see one more interest raise in the US, but that’s not as interesting as how quickly rates then come down.
The bond market expects them to fall soon after and steadily to around 2.5% (halving) as inflation returns to a “normal” level. If that does not happen rates could easily be higher for longer.
In the UK we expect a pause on rate rises.
The EU is spectacularly behind the curve and cut off from rationality – they have further rises to come.
Inflation
US inflation has already halved, it has been a quick decline, but not unexpected.
UK inflation is more stubborn but will start coming down. The UK is lagging the US for various reasons – the war in Ukraine, gas prices and supply chain issues amongst them.
Gas prices are much reduced (80%+) from their peak in August last year but this is yet to feed fully into the inflation figures.
Food inflation is bad here, but worse in Germany, for the reasons above but also because of the choices we make about what to eat – out of season fruit and veg is epxensive to produce.
Countries that produce their own food have notably lower inflation – the US for example.
Inflation is made up of product and services inflation. Higher service inflation is usually offset by lower product inflation (or has been for the last 30+ years).
Service inflation in the UK is stubbornly high at around 6.6%, product inflation will soon become product disinflation, but that disinflation will be a temporary relief.
Service inflation will persist as long as there is a tight labour market.
GDP
It seems like we have been waiting for a recession for some time.
Can you really have a recession without significant unemployment? We think not.
If we don’t see a recession by the end of this year it has probably been dodged for this cycle.
In the US plenty of indicators suggest bad things are on the way. Yet JPMorgan reports that, across the US, they see little untoward. Then again it seems that US regional banks are starting to tighten up on their credit giving.
The signals are mixed to say the least.
In the UK we are doing much, much better than the Bank Of England’s doom-laden forecasts of last year.
The body with presumably the best access to the best data available got it wrong. Again. A good reminder to ignore all economic forecasts at all times.
A recession may or may not happen here, we wait with bated breath. If it does it will help bring down inflation further and quicker.
Expected investment returns
We expect short-term returns to continue in a sort of sideways fashion. If they break out in any direction we think down is more likely than up at the moment.
Longer term neither equity nor high yield bond valuations are exciting. This is as good a reason as any for us to expect the next breakout to downwards – it will go someway to restoring more compelling valuations.
TCFP Model Portfolio
Still no changes, although we are on alert.
We will be meeting in two months rather than three and expect to make changes in the light of the next rounds of economic data.
We anticipate shifting the equity holdings from 30% large, 30% small, 20% emerging markets to something more like 40% large, 25% small, 15% emerging markets. This would make out quite neutral current position a bit more neutral.
Between now and June though we might have a big leg down in which case the 80% equity, 20% bond model might well be changed to 85:15 or 90:10.
Time will tell.
And that concluded April’s meeting. The next meeting will be in June, or sooner if needs be.