Limiting the shock: adjusting personal finances to market turmoil

Most UK investment managers have spent the past week staring at their screens, watching the impact on their funds of the UK market turmoil. But a British fund house executive spent the week by the pool in Dubai, worrying about the hotel bill.

“I was watching my holidays get more expensive every day,” he said. But his own concerns about the pound sterling have been overwhelmed by the magnitude of the financial crisis gripping London. “This is really one where we will probably never see something like this again in our careers.”

Although the pound and government bonds have rebounded from lows after a massive £ 65bn intervention by the Bank of England, the market swings that followed Prime Minister Liz Truss’s “mini” budget will impose lasting pain. according to asset managers.

They expect a further squeeze in living standards, with the damage caused by higher energy bills, even more inflation and increased borrowing costs, especially on mortgages.

“It will hit households in terms of inflation, higher interest rates and a more difficult mortgage market. . . and a push out of where inflation peaks, ”says Richard Flax, chief investment officer of digital wealth manager Moneyfarm.

While some daring investors like to spot sell-off opportunities, the cloud of uncertainty already looming over markets from the war in Ukraine, energy prices, inflation and economic hardship has only darkened.

“There is a lot of nervousness,” says Alexandra Loydon, director of partner engagement and advisory at St James’s Place, the UK’s largest wealth manager.

He spent the week conferring with SJP’s army of 4,600 financial advisors, who are answering questions from 800,000 clients. She says: “It is difficult to provide certainty and reassurance in such uncertain markets, but encouraging the right behavior is really important. . . don’t start moving resources and stay invested “.

The $ per £ line chart showing the pounding pound continues

How do wealth managers evaluate what happened in the markets this week?

While the pound’s fall monopolized the headlines after Chancellor Kwasi Kwarteng’s speech, the mid-week drama in UK public debt was arguably far more significant for financial professionals and ordinary savers.

British sovereign bonds, known as gilts, have seen some of their sharpest moves ever. “What we have seen is a kind of crisis of confidence in both the gilt and sterling markets,” said Peter Spiller, manager of Capital Gearing investment fund.

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Duncan MacInnes, Ruffer’s investment director, says gilts have seen “absolutely wild trips to a first-world sovereign bond market.”

The BoE stepped in after falling prices posed a serious threat to pension funds by using special strategies known as liability-led investing (LDI) to manage risk.

The yield – the interest rate that rises when prices fall – on the UK’s 30-year gilt, which hit a 20-year high of more than 5% on Wednesday, fell to 3.85% on Friday morning.

The intervention leaves the BoE torn between a promise to raise interest rates to fight inflation and an emergency money-printing operation. Professional investors are still betting on further central bank rate hikes. “At this stage they have only increased the confusion,” says MacInnes.

Line chart of UK government bond yields (%) showing gilts hit hard by

Will mortgage fears fuel the cost of living crisis?

Public debt markets are important to households because they set the baseline for mortgages and other personal loans.

Loydon said customers were starting to grapple with the impending “huge impact” of rising rates and demand.

The average standard floating rate for mortgages, which had already risen to its highest level in a decade – above 5 percent – at the beginning of the month, could now rise to 6 percent.

The turmoil made it difficult for suppliers to price new forward offers, with thousands of products being withdrawn. About 600,000 fixed-rate mortgage contracts will expire by the end of the year, with 1.8 million on the way for renewal next year, according to UK Finance.

The government-imposed maximum price of energy has somewhat mitigated the immediate cost-of-living crisis by limiting the expected maximum inflation rate in the coming months to around 10%. But bills are still rising, and with Truss’s business plans likely to expand public debt, the upward pressure on inflation could last longer.

While many affluent households that make up the wealth managers’ client base will benefit from the end of the 45% higher income tax rate on profits above £ 150,000 per year and a reversal of the tax increase on dividends, these earnings for many mortgage holders, be offset by higher interest rates.

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Rachel Winter, partner of wealth manager Killik & Co, says mortgages have “replaced energy bills as the number one fear in the UK. . . You have almost taken away the advantage of giving people a lower tax rate. “

Meanwhile, wealth managers say clients often underestimate the impact of the pound’s movements. Although the pound regained much of the ground it lost by Friday, trading around $ 1.12 against the US dollar, from a low of $ 1.03, it is still widely regarded as fragile. Much depends on how the government reacts ahead of the announcement of the fiscal plan scheduled for November.

“A devaluation of the pound is inflationary and means the cost of living squeeze will get worse,” said Edward Park, Brooks Macdonald’s chief investment officer.

What should I do with my wallet?

The good news for many savers is that global investments can provide protection from the UK turmoil. In particular, if the pound weakens, foreign assets are worth more in terms of pounds.

“If you are a sterling-based investor with a well-diversified portfolio, the weak pound is worthwhile,” says Janet Mui, head of market analysis at wealth manager Brewin Dolphin.

Wealth advisors have been inundated with questions from clients: They want to know whether to buy sterling or gilts at current prices, or to decrease sterling holdings in case the currency drops again.

Experts strongly advise people not to make sudden moves. “It’s the old advice: If you’re going to panic, panic first. If you haven’t panicked yet, it’s probably a little too late, ”says MacInnes.

But the uncertainty in the UK underscores the importance of diversifying away from the home market. Most UK retail investors have allocated more than a quarter of their portfolio to UK equities, according to a Quilter survey last year, despite the country making up only 4% of the MSCI World index.

The UK’s FTSE 100 index itself offers global exposure, as its companies make 80% of their revenues overseas. This offers exposure to foreign currency, but still limits the choice of companies, especially as the UK market is heavy on energy and mining and light on technology.

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Wealth managers say their clients also fear higher financing costs threaten home prices. “For the past few decades, ownership has been something you can live in and it doubles as a diversified investment portfolio,” says William Hobbs, chief investment officer of Barclays Wealth & Investments. The market crisis has challenged the hypothesis that house prices will rise steadily, he argues.

“That’s why you need to have diversified exposure to the world economy, not just one particular street in the UK.”

Capital Economics bluntly predicts: “Both a recession and a sharp drop in house prices seem inevitable.”

Meanwhile, investors need to be wary of investing in companies that carry a lot of debt, as borrowing costs are rising rapidly. “Debt is how you get into trouble, whether you are an individual, a company or a country,” says Christopher Rossbach, managing partner of J Stern & Co. He recommends looking into company balance sheets.

Gold, the traditional safe haven, has performed well as a hedge in terms of sterling, increasing by around 16% over the past 12 months. But it’s falling in dollar terms, suggesting there may be better ways of hedging. “I would be very wary of those who tell you that whatever the question is, gold is the answer,” says Hobbs.

Gold also pays no income, so it becomes less attractive as interest rates rise. While bonds plummeted this year and the UK gilt market reversed this week, higher yields are starting to make investors turn to debt instruments over the long term.

“We have a lot of customers who, in my opinion, have too much cash,” says Winter. “It is now possible to have a rather diversified portfolio of rather senior corporate bonds with a yield of around 6 percent.”

Savers wishing to hold cash, despite the threat of inflation, are advised to find the best rates, as banks vary and many high-end lenders have poor offers.

The return of decent interest rates on deposits and bonds represents a big change for savers. MacInnes says, “This is a profound shift in the investment landscape that has come out of nowhere in the past six months.”

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