​As 2022 draws to a close, markets have rallied on hopes of slower inflation and a softening of interest rate policy by the US Central Reserve Bank. However, much more evidence of slowing inflation will be needed before we see any loosening of monetary policy.
At some point in 2023, it is hoped we will see inflationary pressures easing, a peak in US interest rates, and fears of a deep economic recession subsiding. It is not a question of if, but when.
Long-term investors who adopt the philosophy of ‘time IN the markets, not TIMING the markets’ should eventually be rewarded. It is much trickier to know when to go back into riskier assets from cash, than to come out of them so we continue to advise that clients remain invested and stay patient.
After all, if the alternative is cash, bank interest rates remain well below actual inflation numbers, leading to an erosion of purchasing power. Not a long-term solution.
That is not to say, we do not expect further market volatility in the coming months. Weaker company profits and adverse macro-economic data continue to be reported on the one hand, but on the other, we saw better than expected inflation data in the US recently which sparked a sharp rally. Volatility is the short-term watchword at least for the time being, but if you are not invested, those rallies will be missed.
Historically, markets have tended to bottom once interest rate cuts are on the cards, but investors need more assurances that inflation has peaked and is falling back to a ‘normal’ range. History also tells us that markets tend to turn for the better before the bottoming of an economic cycle as investors position themselves for an anticipated recovery. This is where investors can be too late coming to the party if they are sitting on cash.
Exactly when markets start to anticipate a better growth outlook will depend on a number of factors, and notwithstanding any unforeseen events, be they geo-political, economic, or otherwise.
OutlookAn appetite for riskier assets may intensify as 2023 evolves but before that, we can probably expect further market volatility. We will need to see interest rates peak and recede, and a bottoming of corporate earnings and economic data. This is also likely to lead to a softer US Dollar valuation. What history has told us is that equities should outperform most asset classes, and at least provide growth above inflation. Time IN the markets!
 

AP Advisers Ltd is supporting the upcoming British Chamber of Commerce Business Awards as a Bronze Sponsor, aligning the organization’s own values with that of the Awards whilst giving a voice to some of the inspiring stories of endeavour that will be showcased at a critical time for business development. The BBA's are celebrated annually by British Chamber members and their guests, and is a fantastic spectacle. More details HERE.      

Rob Williams of AP Advisers Ltd....

“We are proud to support the BBA this year as long-term BCCJ members. I always look forward to the BBA’s which is magnificently organized by the BCCJ team and seems to reach new heights with each passing year. We are delighted to be associated with an event recognizing outstanding corporate and individual achievement in what has been a very challenging and memorable year"

We would like to share below, the current market views of Canaccord Genuity Wealth Management, a UK-based fund manager who manage and administer over GBP32 billion in assets (as at March 2022).
 
This is the view of only one fund manager and is not necessarily the house view of AP Advisers Limited. It is for information only and is not a recommendation or solicitation to invest or disinvest. We believe however, that it offers a more balanced commentary on current market conditions...  
 
Volatility is rattling markets as we write, with concerns about inflation, interest rates and economic growth. Although it is impossible to forecast short-term movements in risk assets, it is possible already to see how there might be opportunities to take investment risks in the near future.

What is the US Federal Reserve aiming to do?

The market movements this year have been remarkable by their speed. The US Federal Reserve (Fed) has announced its planned interest rate hikes in full, and markets have reacted very quickly to its statements. Clearly, the Fed has been as surprised as investors by the acceleration and broadening of price rises. The Fed’s primary objective has switched very fast from achieving full employment to controlling inflation at any cost, and it has realised that the current level of employment in the US needs to be curtailed in order to bring inflation down to its 2% target. There are currently 1.7 job openings per jobseeker in the US. All the Fed is trying to do is to level that playing field so that wages don’t feed into price rises. This means slowing the US economy by reducing consumer demand, which it has suggested could be achieved without a recession, i.e. with a simple slowdown.

How have markets reacted?

Government bond yields have soared this year, triggering the worst losses to bondholders in living history. This year alone, US 10-year treasury yields have more than doubled from 1.50% to 3.30%, UK gilts from 0.96% to 2.46%, and German bonds from a negative -0.19% to +1.63%. The magnitude and speed of these movements has caused equity markets to correct sharply. The US officially entered a bear market (defined as markets falling 20% from their peak).

How are equities performing?

Within equities, however, there has been more discrimination than within bonds. The FTSE All-Share has been one of the most defensive markets in the world, due to its high energy and commodity components. European equities, though, have fared worse than the US. The main differences in performance, however, are seen not so much between countries but between sectors. The energy sector is up 40% this year whereas information technology is down 30%. This is where the crux of the problem lies: the world has piled up on tech stocks whose future has changed very rapidly as interest rates have surged, whereas energy shares have been forgotten for decades. In simple terms, higher rates reward companies with steady earnings and dividends as opposed to those with faster growth but profits further out. The biggest losers in markets have therefore understandably been ‘profitless tech’: companies with a great investment thesis and a bright future but no immediate prospects of breaking even. Even the largest US tech firms such as Facebook (Meta), Amazon, Apple, Netflix and Google (Alphabet) (known previously as the ‘FAANGs’) – have succumbed to higher rates.

What is the likelihood of a market rebound?

The speed of movements in one direction usually foreshadows a similar speed in the other direction. What is currently missing is the catalyst for a move up. Such catalysts can be of two kinds – technical or fundamental. Technically, an oversold market tends to rebound sharply. Fundamentally, the Fed can take markets out of their misery by changing its rhetoric. If the Fed raises rates sufficiently enough to see inflation pointing durably downwards, it will then have no reason to keep a hawkish stance and will be mindful of the cost to the economy of keeping rates too high for too long.

When could a recovery start to happen?

We don’t know at this stage, but right now, we are probably at the peak of investor gloom and a technical recovery is likely to happen in the next few weeks. The more fundamental rally could come when inflation figures start to moderate in a consistent fashion. Although forecasting that point is beyond analysis, the likelihood is that the point will come sooner than people expect. Unlike the 1970s, the current inflationary surge has not been fed by a weak US dollar, deficient technology, abysmal productivity and cost-of-living adjustments in union contracts. The spike in inflation has indeed broadened within the consumer basket, but wages have lagged prices massively, which should help inflation return to a lower level faster than during other inflationary periods in history.

It is important to note that a high percentage of the excesses accumulated in the long cycle since the 2008 financial crisis are now being unwound very quickly: crypto-currencies, SPACs (special purpose acquisition companies), concept stocks, etc. This should help cleanse markets of their froth much faster than in previous bear markets.

Are there any bright spots in equities currently?

It is interesting that in the middle of the carnage of some equity markets, many areas have remained resilient: Japanese and Asian equities, energy and materials sectors, value shares compared to growth shares. All it would take for other sectors to join them would be a halt to the relentless pace of rising interest rates. We could well see this happen in the next few months and it would be a shame for any investor to miss this recovery.

It is unusual for equity and bond markets to fall so sharply at the same time. It means that both markets could recover simultaneously, with not only shares but also government bonds, corporate bonds and various other credit markets providing upside to investors.

Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.

This is not a recommendation to invest or disinvest in any of the themes or sectors mentioned. They are included for illustrative purposes only.

The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.

The information contained herein is based on materials and sources that we believe to be reliable, however, Canaccord Genuity Wealth Management makes no representation or warranty, either expressed or implied, in relation to the accuracy, completeness or reliability of the information contained herein. All opinions and estimates included in this document are subject to change without notice and Canaccord Genuity Wealth Management is under no obligation to update the information contained herein.

With the tragic events unfolding in Ukraine and with thought for the victims of this terrible conflict, we have compiled some points made by recent asset manager commentaries to give you some perspective. This is for your information only and should not be construed as investment advice.
 

• The duration of the conflict is impossible to predict but it should not stray beyond Ukraine. Should it enter NATO territory, the consequences become potentially much more serious. 
• Assuming it remains within Ukraine, the direct economic impact globally should be limited as Ukraine is a small economy and Russia’s is smaller than the UK. The sanctions imposed on Russia will likely be very damaging to their economy.
• This conflict has shaken stock markets in a predictable pattern. Oil and gas prices have surged, and safe-haven assets like the US dollar, government bonds and gold have risen.
• Russia has experienced the steepest stock market falls, but in developed markets the falls have been relatively modest, with the US holding up better than Europe given the large dependence on Russian gas in the Eurozone.
• The West (particularly Europe) could take a bigger economic hit in the short to medium term, with higher energy prices, loss of business with Russia, and loss of corporate and consumer confidence.
• With the EU’s dependence on Russian gas and oil, a suspension of supplies would affect economic growth in Europe. The US is largely insulated as it is self-sufficient.
• If the conflict remains within Ukraine, it should not cause a major bear market, but rather a short-term shock. Volatility and sharp falls remain possible, but markets had already discounted some of the fears, and had been falling for several weeks prior. 
• Once the conflict is over, volatility should subside. Global growth may then slow significantly due to higher energy prices but may bring the current imbalance of supply/demand back into kilter.

• The immediate impact could be inflation due to energy prices compounding the post-Covid inflationary impact of strong demand and disrupted supply chains.
• Geopolitical events are deeply worrying for investors, but perspective is required. The humanitarian cost is appalling, but wars always end. It comes at a time when the global economy is recovering from the pandemic and while higher energy prices could cause short-term issues, the broader impact should hopefully be limited.
• A secondary effect is that central bank rate hike expectations may be dampened. This is a significant change as many were worrying that rate hikes may be higher than expected. Slower rate hikes could support equity markets in the medium term. 

In Summary:
The US economy is more resilient than Europe, not only because it is self-sustaining in energy, but because the US consumer is healthier financially. Money dished out in the pandemic is still largely unspent, helping consumers cope with rising prices. This is not the case in Europe. China is also resilient, as the source of most supply chains with low inflation. Other Asian countries could also benefit. Of course, US stock markets are dragged down by the conflict but not as deeply as Europe.

It is vital to retain a blend of asset classes in your portfolio, including lower risk bonds and cash as well as equity-based funds. We also believe the long-term investor should not panic-sell in a market dip which could be brief. Unless the war goes beyond Ukraine, markets are expected to recover with time. Obviously, the situation can change daily, making it more important to simply sit tight. 

Contact us here if you wish to discuss you personal portfolio positioning at this time.

This blog post is designed to inform British-domiciled expatriates and those returning to (or connected with) the UK of the recent changes in the Autumn budget. The following are some key points:

• Tax rates for Income Tax, Capital Gain Tax (CGT) or Inheritance Tax (IHT) remained unchanged.  
• The personal income tax allowance; basic rate (£12,570), and higher rate limits (£37,700 & £150,000) have been frozen until April 2026. This means there should be an increase in Government tax receipts.
• Similarly, the IHT nil rate band, CGT annual exemption, and pension lifetime allowance are frozen until April 2026, should see an increase in tax receipts.
• The CGT reporting and payment window following the sale of UK residential property has been extended from 30 to 60 days. The change comes into effect for sales on or after 27 October 2021.

HM Revenue & Customs (HMRC) have recently revealed that IHT receipts from April to September 2021 were £3.1billion, £700million higher than in the same period a year earlier. 

HMRC have also been given more powers to clamp down on mass-market tax scheme avoidance promoters. The changes will contain four measures intended to make it difficult or impossible for organizations to promote these schemes.
 
One potential way to plan for UK inheritance tax mitigation is the use of accepted trust structures which hold client assets and are not viewed as being tax avoidance schemes by HMRC. Although these may be effective in the mitigation of UK inheritance tax, they may not act similarly in other jurisdictions where an individual's estate may be subject to local estate duties.