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ICM: Notes from the 18 July meeting

by | Jul 20, 2022 | Investment News

The latest quarterly Town Close Financial Planning Investment Committee took place on 18 July 2022.

There are no changes to the TCFP portfolio.

Here is what we discussed…

Politics

In the political world we are looking for a new leader of the Conservative party and the country. The Conservative MPs like Rishi, the members do not. We will see who wins through. Sterling will probably gain a bit when the new leader is announced.

The war in Ukraine rumbles on but barely features on FT.com which I review each morning.

In summary there is nothing going on politically that would have us consider changing our portfolio.

 

Interest Rates

We expect interest rates to continue rising and to peak January-March next year. The market expects interest rates to rise to 3% in the UK and 4% in the US. There might even be an interest rate in the EU.

If rates go further than that we can expect investment markets to get the jitters in a not good way.

Investment markets are currently pricing in the figures above.

 

Inflation

Inflation has not yet peaked.

With interest rates (which are the cost of money) and many other goods and services increasing in price, inflation will eventually abate.

It will take time to work through the system and so we are not expecting inflation to start coming down until the end of this year at the earliest.

We believe that investment markets are also pricing in inflation correctly at the moment.

 

Short- and Long-Term Views

There has been significant further volatility in the last three months, making the year to date some of the worst investment conditions imaginable. And it could get worse.

It seems likely that we are recession bound, we might even be there already. Forget the two quarters in the row stuff. A recession is a period of temporary economic decline during which trade and industrial activity reduce significantly.

The two-quarter thing – where GDP has to fall for two consecutive quarters for a recession to be declared – is a red herring.

Think about it: What is worse a 3% drop in GDP followed by a 0.1% increase (-2.9% over two quarters) or a 1% drop followed by another 1% drop (-2% over two quarters)? The second example is a recession, the first is not apparently. That does not make sense.

Proper professional investors do not care about the two quarters, other than knowing it allows them the chance to possibly take advantage of naïve retail investors. They look at month to month data to reach their own conclusions.

The point about a recession is that it should reduce company earnings and that could have an effect on share prices. We do not believe a recession is fully priced in (whereas interest rates and inflation are) and therefore there could easily be more setbacks to come.

This is all the short-term view. But we are long-term investors. The short-term interests us more because of the opportunity it could present us to own more of the many excellent companies around the world a reduced price.

In the short-term your expenses are covered by a combination of earnings, pensions and cash. Your short-term is safe and secure.

In the long-term it is too because you will benefit from the long-term growth of the thousands of excellent companies around the world that you are a part-owner in.

They will, over the long-term, produce inflation beating returns which will fuel your future spending plans. At least, that is exactly how it has always worked out over the long-term previously.

The cost of that long-term prosperity is short-term uncertainty and jitters. We mitigate that with cash / guaranteed pensions / salaries.

In short, it is all good, you are well placed to get through the short-term jitters and still prosper over the long-term.

 

The portfolio

The portfolio remains unchanged. Both bonds and equities have fallen so far this year (only the fourth time in 100 years that has happened), something we have to take on the chin.

We await the next serious downturn in share prices, matched by an up turn in bonds, to make any changes to the portfolio.

We are very confident that opportunity will present itself between now and the end of March next years. At which point we are sure we will be able to grab some extra long-term profit for you.

 

And that was it for July’s meeting. The next meeting will be on 10 October, or sooner if needs be.

 

Boring But Effective | Truthful, Helpful, Kind

advice@townclosefp.co.uk 

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