Economic Commentary – January 2023


We started our last Economic Commentary with the quote, “History never looks like history when you are living through it. It always looks messy, and it always feels uncomfortable.”

And the areas of concern we addressed remain:

  • Supply chains continue to be disrupted
  • The war in Ukraine is moving into its’ 10th month
  • 2022 was littered with further extreme weather events, from record temperatures in the UK to devasting floods that swept across Pakistan.
  • China is now dealing with the consequences of a failed zero covid policy
  • Central Banks are continuing to increase interest rates across the world, tightening the access to finance and walking the finest of tight ropes between reducing inflationary pressures and avoiding deep recessions
  • Political instability remains, as we saw in the UK with the changing of premierships, and we now move into the 2024 US presidential election cycle, with the possible re-run of Biden V Trump.

These problems have not improved over the last six months if anything they have worsened. In a multi polar world, where nations are all experiencing these problems at the same time, one of the key risk for global markets, is stagflation, something that the world has not had to deal with the 1970s.

Stagflation is an economic rollercoaster. A combination of rising prices and no growth. One of the causes of stagflation is when the global economy experiences a supply shock. The current energy shock combining under investment in energy production and sanctions on Russia have disrupted supply causing prices to increase dramatically.

Lower real incomes, less employment, and the prices of essential items rising, it could lead to significant numbers of people having to make tough decisions. Furthermore, if rent or mortgage payments are missed, defaults will start to rise, and property prices will fall.

Central Banks and policy makers now have the extremely challenging task of tackling inflation and Recession at the same time. Central Banks appear likely to continue their strategy of reducing money supply, and governments will need to strike a balance with fiscal policy to simulate long term growth. The difficulty is that Central Banks and Government Policy may be at odds with each other (as we saw in September 2022) and there needs to be harmonious cooperation over the next 12 to 18 months.

Despite the similarities between what is happening today and the 1970s, the UK economy is less reliant on commodities. The British manufacturing sector has shrunk, the UK has diversified its energy strategy with renewable energy, and we have reduced our dependence on gas. Whilst it is too early to determine, the inflation/recession issue should not be as severe as the 1970’s. The Bank of England is forecasting considerable reductions in the rate of inflation throughout 2023.

Expect a continued bumpy ride in 2023.

For the next 6 months, the Gould Financial Planning Investment Committee are positioning the portfolios as follows:

Cash – High (reduced from highest)

We are still recommending that clients hold a high cash position, but we have reduced the allocation from the top weighting. With interest rates now at 3.5% whilst still below inflation, it does offer savers some return, something we have not seen for 10 years. Cash will still be used in the portfolio to dampen the effects of volatility in the short term.

Loans and Debt – Neutral (increased from lowest)

The Investment Committee had been concerned for some time that a normalisation of interest rates would have a negative impact on the Loans and Debt asset class. Simply put, we believed that asset prices were far too high. We therefore kept the exposure to this asset class towards the lowest end of the range, and, overall, during the last 12 months we have seen the Core UK Gilt and Core UK Bond market fall on average 20%.

With the Bank of England raising interest rates to 3.5% and further rises anticipated, our Investment Committee think that the market looks attractive enough to re-enter this space, as investors are once again being compensated for investing in this class.

Property – Low (reduced from neutral)

2023 is likely to be a difficult year for the property and infrastructure asset class. Whilst the IA Infrastructure peer group produced on average a 3.2% return, the effects of rising interest rates, persistent inflation and governments introducing barriers into the energy markets (recently the UK has introduced a cap on profits allowed from renewable energy) is likely to increase volatility in the short term. Our long-term view is that this infrastructure (particularly renewable energy) will be vital for developed economies, and the assets will remain an important mix in a diversified portfolio.

Mixed – Low (reduced from Neutral)

We are maintaining our strategy of using a mix of strategies as a ballast against equity and bond volatility. As Mixed fund managers will include Loans and Debt as part of their overall portfolio, we are reducing the allocation to Mixed assets at the headline level, as we are increasing the exposure to Loans and Debt directly.

UK Equity – High (no change)

We are maintaining a high weight to UK Equity, but we are reducing UK Small Cap exposure, in favour of FTSE 100 companies. During periods of inflation, history tells us that the safest places to invest are in real assets.

Overseas Equity – High (no change)

We are maintaining a prominent position in Global Equity. Our largest allocation will still be towards the larger, more established global businesses, with satellite holdings in Gold, Themes, Resources and Global Smaller Companies. We are continuing a negative stance on Emerging Markets due to concerns regarding high borrowing in dollars.

Past performance is not a guarantee to future performance and the value of investments and income from them can fall as well as rise.

This article has been written for information purposes only and does not represent personalised advice.






Article published: 04/01/2023

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