This week saw further weakness within investment markets as the Federal Reserve (Fed) and Bank of England (BoE) both raised interest rates in the face of spiralling inflation.
Whilst the rise was widely expected, the 0.75% increase in the States was the largest there since 1994. In the UK, interest rates increased for the fifth consecutive time, by 0.25% to 1.25%. Interestingly, 3 of the 9 BoE members voted for a bigger increase this month of 0.5%.
Having been accused of being slow to act, the Fed and BoE now appear to be trying to get ahead of the curve. Rather than a long-drawn-out period of slow rises, in some regards, investors might prefer the plaster being ripped off quickly. This could be the only way central banks can get inflation back under control, although it reduces the chances of them being able to navigate a soft landing in the economy. The risk that the rising rates will quickly put a hand brake on economic growth now seems elevated.
On the ground, the economic conditions will likely be tough in the coming months. The market, however, is a forward-looking system. As has been the case for previous bear markets, the stock market will start to trend higher long before the picture looks clear.
In the face of all these worries, we look for the core of client portfolios to have exposure to high-quality businesses capable of navigating the storm. By high-quality businesses, we mean companies that are well managed, with strong balance sheets and a history of coming through previous economic cycles. In short, we are looking for exposure to firms that can grow shareholder value in the long run.
With the increased uncertainty, the stock market may well value them lower in the short run but, if they keep growing earnings, investors should be rewarded for their patience with higher prices in the long run. As the famed investor Benjamin Graham stated, “in the short run, the market is a voting machine but in the long run, it is a weighing machine.”
If the market fails to recognise the value of a strong business, they often fall on the radar of private equity investors. We have seen the start of this trend in the last twelve months, as takeover bids have picked up markedly. For our friends across the pond, the weakness of sterling against the dollar makes the current prices look even more attractive.
For further advice on market trends, contact our investment management team on 01604 621 421.
John Naylor, Chartered FCSI – Head of Investment Committee