Last Wednesday saw the release of the 2023 Autumn statement. Announcements have been made which will impact individuals like you on a more personal level, as well as the country on a macroeconomic level.

I’m sure you will have seen this publicised already, however we wanted to offer a recap on the statement and what it means for our clients.

Taxation and Wages

If you are employed Perhaps the biggest change in this area is the reduction of national insurance contributions across the board. For class 1 employee payments, this is being cut from 12% to 10% on earnings from £12,571 – £50,270 which is due to affect roughly 27 million people. To put this into perspective, an employee earning £35,400 will receive a tax cut of just over £450 in the 2024/25 tax year.

There’s good news for those self-employed too. Class 2 self-employed national insurance payments are due to be scrapped. Jeremy Hunt, the finance minister, alleges that this will knock £192 off the tax bill of a £28,200 earner. Additionally, class 4 national insurance contributions are undergoing a change. Currently profits from £12,571 to £50,270 are taxed at 9%, this is due to change to 8%, benefitting all self-employed that operate within this tax bracket, but particularly for those paying higher and additional rate tax.

Additionally, the National Living Wage – is to increase from £10.42 to £11.44 an hour from April.
It is hoped that these measures will aid the wider economy after a period of sluggish growth and high interest rates.

Benefits and Pensions

The state pension has remained intact and is due to increase by 8.5% from April 2024 in line with the average earnings index for a full state pension entitlement of £221.20 a week. This shows the government’s commitment to maintaining the triple-lock, which is good news for those currently in receipt of a state pension, alongside those which are due to receive one within the near future.

This may be the most interesting development area to come out of the statement. There is ongoing consultation to determine whether employees could pick the pension scheme that their employers pay into – possibly allowing them to have one pension pot for life.

 The full details of this proposal have not been fully publicised, but the general implications would suggest that employees would have to do less administration regarding their pensions, but may find themselves unknowingly bound into a sub-par default scheme, prioritising their convenience over investment growth.

However, don’t get your hopes up of this happening too quickly. Fairey Associates Head of Financial Planning, Paul Richardson, commented “Whilst this is a great idea in principle, it will be hard to implement on a country wide basis due to the complications with payroll systems. It is likely to be an administrative burden, especially for larger companies with thousands of staff.”

Wider economy and Public Finances

The announcements here are a mixed bag from the government. On one hand, it is projected that pre-pandemic living standards are not due to return until 2027-28, suggesting that at least in the short term, the economy is likely to endure more pain, and consumers are generally due to continue to feel more stretched than in comparison to 2019.

On the other hand, inflation is projected to subside back to the Bank of England’s target of 2% by 2025. This could be viewed as a positive as prices look to rise at a slower rate than which they currently are, with a headline inflation figure of 4.6% in October 2023, which is much lower than the headline figure of 11.1% in October 2022.

The government billed this budget as an “Autumn statement for growth”, and the objectives seek to put that into action, but with prices still rising more than target levels and an upcoming general election, there could be less headroom for changes in the spring.

References:

https://www.which.co.uk/news/article/autumn-statement-2023-what-it-means-for-your-money-ahPDN3o9cK1f

https://www.bbc.co.uk/news/business-67276717

https://www.cnbc.com/2023/11/22/autumn-statement-uks-jeremy-hunt-to-announce-tax-cuts.html

Risk Warnings

• The value of an investment and the income from it could go down as well as up.
• All investing is subject to risk, including the possible loss of the money you invest.
• Past performance is not a reliable indicator of future results.
• Diversification does not ensure a profit or protect against a loss.
• Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income
• This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 30th November 2023. You are recommended to seek competent professional advice before taking any action.

VCTs were launched in 1995 as vehicles to encourage UK taxpayers to invest in smaller, higher-risk UK unlisted companies which needed start-up, early stage or growth capital. VCTs pool investors’ money and normally appoint a regulated fund (investment) manager who manages the fund on a day-to-day basis. The fund manager invests in companies to seek to maximise the return to shareholders, subject to the stated objective of the VCT. The fund managers tend to work with or advise their privately-owned companies over the long term and aim to help increase their value.

VCTs make an important contribution to the UK economy by investing in small to medium sized growth businesses that often promote innovation, industrial change and modernisation of working practices. Investee companies may struggle to access traditional forms of debt and so need other sources of finance. The amounts of capital these companies require often varies between £100,000 and £10 million and so are beyond the means of most individual investors.

Most VCTs pursue an evergreen strategy, which means that the VCTs do not intend to wind up in the foreseeable future and exit proceeds from the realisation of investee companies are typically reinvested into new investee companies (although special dividends may be paid to investors where a gain is made on an investment made by the VCT). Investors will typically exit from evergreen VCTs by selling their shares on the exchange on which the VCT is listed, or by availing of any share buy-back policy offered by the VCT.

VCT investments aim to offer:

• tax free capital growth
• tax free dividends
• income tax relief at up to 30%

In order to maintain the tax benefits available from investing in a VCT, an investor must hold their shares for 5 years from the date of issue and the company must continue to meet the qualifying conditions throughout this period. Failure to do so, could result in the VCT losing its status and a withdrawal of the tax reliefs for all investors within their 5-year restricted period (as well as a removal of the tax-free dividend status going forward).

Investors should be aware that returns are not guaranteed, and the original amounts invested could be lost in part or in their entirety. VCT investments should be considered long-term investments, being at least five years, if not longer. Furthermore, the availability of tax benefits should not distract investors from the need to properly consider the risks versus potential returns of any given opportunity. As with any alternative investment, tax should not be the driving reason behind an individual’s reason decision to invest. However, as with any investment, capital is at risk and investors should remember that VCTs are buying shares in and lending money to smaller, often privately-owned and younger companies which, due to their nature, should be viewed as higher risk than investing in larger, more established companies.

Source (MI Capital Research Limited (MICAP) 

Risk Warnings:

• The value of an investment and the income from it could go down as well as up.
• All investing is subject to risk, including the possible loss of the money you invest.
• Past performance is not a reliable indicator of future results.
• Diversification does not ensure a profit or protect against a loss.
• Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
• This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 31st October 2023. You are recommended to seek competent professional advice before taking any action. 

Inflation in the West is still higher than central banks would like; although it feels like most developed markets have passed ‘peak inflation’ now. The previous hopes of interest rates starting to reduce by the end of the year have now been re-adjusted to rates remaining frozen until 2024.  

The US Federal Bank and the Bank of England both took a pause in raising interest rates in September but have been mindful in their commentary that this may not be the end of the tightening cycle if data suggests more needs to be done.

In contrast, the European Central Bank raised main interest rates by 0.25% but did indicate this could be the last increase they will impose. Christine Langarde, the President of the ECB, stated that the ECB considers that rates “have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target”. She has repeatedly suggested that although the rates may have reached their peak, they would stay elevated for an extended period of time.  
​
In summary, although the current economic climate still isn’t a friendly environment for broad asset classes, marking a break from a four-decade period of steady growth and inflation, fund houses still see opportunities in income (for example Corporate Bond exposure), emerging markets and undervalued geographical regions such as Japan. This is why Fairey Associates use asset allocation as a core principle for our investment methodology and ensure your portfolios are diversified across a wide range of asset classes, regions, and market caps. 

Risk Warnings:

• The value of an investment and the income from it could go down as well as up.
• All investing is subject to risk, including the possible loss of the money you invest.
• Past performance is not a reliable indicator of future results.
• Diversification does not ensure a profit or protect against a loss.
• Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
• This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 2nd October 2023. You are recommended to seek competent professional advice before taking any action. 

What is a bed and ISA?

A bed and ISA transaction is the process of selling investments held in a general investment account, transferring the cash, and then buying back the same assets within a stocks and shares ISA. This transaction is only facilitated by certain investment providers and is done almost simultaneously to minimise any big moves happening in the market from the point of sale to the point of repurchase.

Why could this be beneficial to an investor?

The government, in November 2022, cut the capital gains tax (CGT) allowance from £12,300 to £6,000 which commenced from April 2023. Further cuts are on the horizon, with the allowance being halved to £3,000 in the 2024/25 tax year. This creates much less of an incentive for all investors, from a tax point of view, to hold assets in a general investment account – with higher and additional rate taxpayers feeling more of the pain.

Luckily, each investor has a £20,000 annual ISA allowance which they can utilise to avoid paying any tax on the gains they make on investments held within an ISA. There are range of ISAs to account for different investor needs and risk profiles but it is most commonly a Stocks and Shares ISA that is used in the Bed and ISA transaction.

Bed and ISAs are particularly beneficial for an investor in the instance that they wish to keep their investments that are currently held outside of an ISA but wish to shelter themselves from any tax made on those investments. It is also a way to benefit from the government’s very generous ISA allowance without any readily available cash on hand.

This process has already shown investor interest. Between November 2022 and February 2023, AJ Bell “saw a 387% increase in platform Bed and ISA transactions compared with the same period in 2021/22”[1].

What are the risks and disadvantages associated with this transaction?

As with everything in the investment world, there are some downsides. It is possible an investor may incur stamp duty charges if they hold individual shares or ETFs. Additionally, dealing charges from investment providers when selling and repurchasing their investments will be due. An investor should also be aware of the possibility of market fluctuations which may not work in their favour.
Additionally, an investor should be aware of their tax position within their general investment account as selling investments held in this type of account may generate CGT implications. With even less generous CGT allowances being forecasted this is an issue to consider.

[1] https://moneyage.co.uk/bed-and-isa-transactions-surge-since-chancellors-november-tax-changes.php

Risk Warnings:

The value of an investment and the income from it could go down as well as up.

All investing is subject to risk, including the possible loss of the money you invest.

Past performance is not a reliable indicator of future results.

Diversification does not ensure a profit or protect against a loss.

Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 20th April 2023. You are recommended to seek competent professional advice before taking any action. ​

Six months into 2023 and market volatility still seems very much the order of the day; but what has caused this market concern and are there signs of this abating?

Stubbornly high inflation is still causing headaches for the Federal Reserve, the European Central Bank and Bank of England.

In the US the Federal Bank has undertaken the fastest rate hike campaign since the 1980s and the markets seem to have finally grasped inflation’s persistence and have given up on the idea of rate cuts in 2023 (markets had previously priced in price cuts before the end of the year). The Federal Reserve has announced they are pausing interest rate increases for now but warned that there could be two further rate increases this year.

The European Central Bank also raised rates in May and announced they aren’t finished yet and more interest rate increases are likely in 2023.

Here in the UK, inflation stuck unexpectedly at 8.7% for May and the Bank of England raised interest rates by a bigger than expected 0.5% to 5.0%. Market expectations for the end of the year are for the UK base rate to be up to 6.25% – the highest level since the late 1990s.

Of much concern is how many homeowners in the UK will see their fixed rate mortgage deals end (which are much cheaper than those available on the market now) and how much of a squeeze this will be on household income. The prevalence of fixed term mortgages produce the effect of delaying the impact of rising interest rates as households still have disposable income and this could force the Bank of England to perhaps push rates higher than they would otherwise have to do.

What does this mean for the Pound? 

Despite concerns about a weak UK economy and soaring budget deficit, the pound has continued to gain ground against the US dollar in June however against the Euro this has been more muted. Broadly speaking, Sterling is back to where it was five years ago, however the pound will still buy considerably less than it once did.

Markets are betting that interest rates in the US will start to drop sooner than in the UK – US Consumer Price Inflation has fallen quite sharply since Spring but inflation remains stickier in the UK, as such investors are holding sterling for potentially higher returns.

The strengthening of the pound is great for companies that import a lot of goods for sale in the UK – and likewise for holiday makers who may buy more in currency exchange.

The knock on effect however is that the UK stock market is very much exposed to overseas earnings – more than 75% for the FTSE 100 and c. 50% for the FTSE 250. Some UK listed companies earn most of the revenues in US dollars and have very little to do with the UK economy but benefit from a stronger dollar. Their earnings will be adversely affected by the strengthening of the pound.

How have global equities fared so far this year? 

Although the S&P 500 index is up just over 8.5% so far this year, having seen a shock in March following the mini banking crisis, this is being driven by a few large technology firms as they benefit from the AI buzz. In recent weeks, performance has dropped off as the markets price in changes in interest expectations.

The FTSE Developed Europe (ex UK) index has performed well, having recovered from March’s turmoil. The index could be impacted by the news of Germany technically being in recession, but greater concern is over higher interest rates affecting corporate profits due to higher borrowing costs. For this year, our
​portfolios’ allocation to Europe has been increased as we believe there is more potential for growth over the UK.

Performance chart from 30th December 2022 to 27th June 2023 showing index performance for the year to date on a bid to bid basis.

Japan has also posted positive returns for the first six months of the year although in recent weeks has seen much of the gains made in early June reversed.

Both the emerging markets and Asia Pacific region (ex Japan) have lost all gains they made in the lead up to mid March although for many of the emerging markets, the weakening Dollar will relieve some national debt stresses.

Looking forward, bouts of volatility are probably the only constant that investors can expect for the rest of 2023. With increasing interest rates, investors believe the probability is that economies are heading towards recession which will have an effect on equity markets. So far, they have remained resilient, with strong labour markets and continued consumer spending but it is doubtful this good news can continue beyond the second half of the year.  

What about fixed interest holdings? 

For a long time, equities offered a much higher yield than bonds or cash and it’s been a long time since investors have been particularly interested in fixed income investments other than for diversification purposes. Now, the consensus view among investors is that bonds are back and the outlook for various fixed income investments confirm a significant shift in investor sentiment.

Investors have been moving to bonds over 2023 on the promise that last year’s big fall in value is ripe for a reversal. So far that trade has failed to deliver the hoped for returns because the peak interest rates keep being pushed further back (and at a higher level). The feeling is, however, that the longer the underperformance goes on, the better the prospective returns from bonds become.  
​
Although bonds have had a bad year, they are still an integral part of portfolio construction. Different asset classes over and underperform over time and it is important to maintain discipline and investment strategy for the longer term and not react to short term market cycles.

Risk Warnings:

The value of an investment and the income from it could go down as well as up.

All investing is subject to risk, including the possible loss of the money you invest.

Past performance is not a reliable indicator of future results.

Diversification does not ensure a profit or protect against a loss.

Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 20th April 2023. You are recommended to seek competent professional advice before taking any action. ​

By now, you may have been contacted by your bank or building society, or seen in the press about Consumer Duty. This mailer provides a summary of what it is, who it applies to and how it could affect your interactions with financial services and institutions. 

​What is Consumer Duty?

Consumer Duty is legislation being introduced from the end of July 2023. Consumer Duty demands that all who operate in the financial services market evidence that they are acting to deliver good outcomes for retail clients.

Who does Consumer Duty apply to?

The scope of the legislation is far reaching and applies to all firms who have an influence over retail customer outcomes. For clients of Fairey Associates, it will apply to us as advisers, the product providers we recommend, as well as the fund managers who manage the underlying holdings within our model portfolios and/or legacy investments and the discretionary fund managers we use.

What are the ‘outcomes’ for retail clients? 

The four outcomes that each firm must consider and evidence are

• Products & Services – we must be able to evidence that the design of our products and services meet the needs, characteristics and objectives of our target markets.
• Price & Value – we must evidence that our products and services give fair value
• Consumer understanding – we must evidence that our communications are understandable and understood by our clients.
• Consumer Support – we must evidence that all clients can realise the benefits of our products or services.

Are Fairey Associates ready for the 31st July 2023 deadline?

We have been working hard in the background to ensure we can demonstrate that our clients best interests are at the core of our processes and services offered. Having followed a detailed implementation plan over the last year we are confident we are ready for 31st July 2023. 

We have undertaken detailed assessments of our services, that they offer fair value and the products/solutions we recommend to you are suitable for your requirements at the time of advice.

Will Consumer Duty change the client relationship with Fairey Associates? 

Although we have been working hard in the background, we don’t believe the relationship with our clients to be significantly impacted by the legislation as creating positive client outcomes have been at the heart of the services we provide since we started in 2008.

That said, we understand the importance of evolving in order to provide the best service possible to our clients and Consumer Duty has helped us review where we can refine what we do and how we do it – with the ultimate goal of improving client outcomes further. Therefore, any changes felt we expect to be positive.

As expected, the first quarter of 2023 has seen further interest rate increases globally and inflation  is still higher than targeted in developed economies. Outlooks are generally expecting volatility in equity markets but fixed income holdings are continuing to provide higher income yields than seen in over a decade.

Commentary still remains mixed as to which economies will experience a recession in 2023 and how severe the regional recessions could be. Some of the prior optimism we saw in January has been reined back following the collapse of two US Banks and the forced takeover of Credit Suisse but there is still belief that some growth is possible and opportunities are still presenting themselves as valuations start to look more appealing.

How have asset classes performed so far this year?

Although the income yields of Fixed Interest investments are still higher than we’ve seen for a number of years, the capital value of the investments are still sensitive to persistent high inflation as shown in the graph below which shows the performance of relevant indices for Corporate and Government Bond holdings.

Also shown is how the UK Direct Property sector has performed since the start of the year. Although growth has been very slow, as an asset class it has helped with volatility within diversified portfolios. 

The chart below shows equity index performance since January with the Euro Stoxx demonstrating a strong start to the year.  The developed markets have so far seen more recovery than both the emerging markets and Asia Pacific region. ​

What’s going on with the banks?

As interest rates continued to rise in the US and Europe, a mini banking crisis materialised when the Silicon Valley Bank (SVB) and Signature Bank failed and there was a forced takeover of Credit Suisse in Europe. This had brought back fears of a credit crunch akin to those experienced in the global financial crisis in 2008.

SVB specialized in lending to technology companies and the bank grew by over 400% in just 3 years. Due to its concentrated deposit client base, and main investment in government securities, as rates rose and the confidence in SVB’s balance sheet diminished, depositors withdrew around £3 billion of deposits in a single day. Once a run on a bank starts it can be difficult to stop and subsequently SVB collapsed.

Closer to home, Credit Suisse also suffered at the hands of central bank interest rate increases and with a loss of market confidence in the what looked to be a healthy looking balance sheet, the Swiss financial regulator had to step in which resulted in a forced take over by UBS. Credit Suisse held high uninsured deposits and had posted sizeable losses in both 2021 and 2022 which put them under more stress in the change of market conditions.

The fallout from the collapse of SVB may have been contained but its effects have been felt across global equity markets. The banking industry’s vulnerabilities are a sign of a tighter monetary environment and this could lead to even tighter financial conditions that may have an earlier and more significant impact on the real economy. Some commentators have suggested that further interest rate increases, while perhaps being viewed as necessary to contain inflation, could exacerbate the economic weakness.

The Bank of England has confirmed that there has been no increased stress in the UK Banking system because of the turmoil  (although they are monitoring the banks carefully) and inflation remains their primary concern. UK and Irish Banks are subject to better regulatory frameworks, deposit structures, and accounting practices than many other developed market jurisdictions and importantly, they are restricted in how much interest rate risk they can take with deposits. Many UK banks also have a diversified deposit base with less customer concentration.

Investment Committee discussions in the last quarter 

The Investment Committee have recently met and are reviewing market information during the lead up to the new portfolios release in June. At this point, we still remain comfortable with the strategic allocation of equities, fixed interest, property and cash holdings but we have discussed options around changes to our geographical weightings as well as conducting our full annual review of our fund panel. This work will be stepping up further over the next month ready for our June release. 

Risk Warnings:

All investing is subject to risk, including the possible loss of the money you invest.

The value of an investment and the income from it could go down as well as up.

Past performance is not a reliable indicator of future results.

Diversification does not ensure a profit or protect against a loss.

Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 20th April 2023. You are recommended to seek competent professional advice before taking any action. 

How might some of the new proposals impact you? 

These are general takeaways, if you have specific questions of how this might impact you, please contact your adviser through either normal means or the contact page

Pension Changes
Lifetime Allowance

1. The Lifetime Allowance of £1,073,100 will be abolished from the 6th April 2024. However no tax charges will be made for Pensions over the allowance from the 6th April 2023.
2. The maximum tax free lump sum, for those without protection, remains at £268,275. This is 25% of the previous Lifetime Allowance of £1,073,100, any withdrawals above this will be taxed at your marginal rate.
3. Currently pensions grow outside of your estate for Inheritance Tax purposes. The abolition of the Lifetime Allowance means there are no caps on the amount you can save in your pension, and outside of your estate.
4. Those that die before the age of 75 could pass their pension benefits to their beneficiaries tax free, previously this was limited to the Lifetime Allowance. The changes now make this unlimited.
5. Those that die after age 75 see their beneficiaries incurring income tax charges at their marginal rates.

If you have questions on how changes to the Lifetime Allowance may impact the Inheritance position on your estate please speak to your adviser.

Annual Allowance

1. The annual allowance has been increased from £40,000 to £60,000.
2. The income threshold before the tapered annual allowance is applied has been increased from £240,000 to £260,000.
3. The tapering now stops when your allowance has been reduced to £10,000, this is £6,000 higher than the previous amount of £4,000.

Again please speak to your adviser if you are thinking of making additional contributions or are unsure of how this impacts your tax position.

Money Purchase Annual Allowance (MPAA)

1. The MPAA has been increased from £4,000 to £10,000.

If you have taken taxable income from your pension you will have triggered the MPAA.

Childcare Proposals

1. The extension of 30 free hours childcare (38 weeks of the year) to parents with children aged 9 months to three years old. Available where no parent has an individual income of over £100,000.

The cost of childcare provisions has seen many parents reduce their hours or stopping work altogether and stay at home to look after their children. It has also seen an increase in the number of those in retirement looking after their grandchildren to help parents balance childcare responsibilities and career growth.

The changes proposed aim to alleviate these problems and encourage more parents to return to work once their maternity/paternity comes to an end, it could also see fewer grandparents being required to spend large parts of their retirement assisting with childcare, and more time available for cheese, wine, beers and holidays!

These changes will be implemented over an 18-month period. Further details can be found here
https://educationhub.blog.gov.uk/2023/03/16/budget-2023-everything-you-need-to-know-about-childcare-support/

Energy Support Extension

1. The energy support scheme has been extended for a further 3 months until the end of June.

The energy price cap was set to be increased to £3,000 in April, however with energy bills set to start to fall in July it was announced that the cap would remain in place for a further 3 months.

Overall 2022 had been one of the worst periods on record for investors with many asset classes in the red and the typical asset class correlations breaking down (2022 was one of only three years in the past century where equities and bonds fell at the same time, 1931 and 1969 being the other two years, both of which presaged periods of higher inflation and economic volatility). Multi asset portfolios had very few places to hide and in December many thought the markets still had more rough waters to navigate in the next 12 – 24 months.  

Performance chart showing total return performance of major global indices over the 2022 calendar year.

Global equity markets faced numerous challenges throughout 2022 including rising interest rates, inflation and threats of a looming global recession. The combination of conditions saw global equity markets post significant losses in US dollar terms. Global markets saw their worst year since 2008 in local currency terms.

At the latter end of 2021, many believed the inflation we were experiencing was ‘transitionary’, fuelled by pressures of global supply chain disruption that first started to appear after Covid, but this inflation became much more problematic and prolonged by the escalation of Russian aggression in Ukraine in February 2022. The tightening of monetary policy across the globe in order to try to control inflation saw sharp increases in interest rates over the course of the year. 

​The result of rising interest rates saw traditional higher growth areas such as technology stocks experience sharp sell-offs and when inflation really started to bite, more companies came under pressure. Energy and Commodity holdings were two of the few strong sectors as prices rose on the back of strong demand and weaker supply.

Currency movements also had a notable impact with the US dollar being pushed higher against the world’s other main currencies thanks to the Federal Reserve’s early and aggressive approach to raising interest rates in comparison to other central banks.

As well as being a difficult year for equity markets, 2022 was also a terrible year for most fixed income investors with the same causes such as rising inflation, higher interest rates, the impact of Covid as well as soaring government debt.

In the UK, the then Chancellor Kwasi-Kwarteng’s unfunded mini-budget threw the Gilt market into crisis in which a fire sale followed and gilt yields soared to levels not seen since the global financial crisis of 2008 while Sterling fell to an all-time low. It took a Bank of England intervention to buy £65 billion of longer dated gilts to bring relief to the market and help protect the UK pension industry against a ‘doom loop’.  

What’s in store for 2023? 

We don’t have a crystal ball here at Fairey Associates and when looking back at the last two to three years, it really is a futile exercise trying to predict what is in store for investors with precision.

In December, the forecast by most fund houses was gloomy for 2023 and the first draft of this outlook reflected the concerns of the fund managers however we move forward four weeks and already there are signs that the worst case scenarios forecast in December may now be looking more unlikely.

Inflation 

The consensus seems to be that there are early indicators that inflation has peaked for many regions. That said, inflation is still likely to remain elevated above the Central Banks’ inflation targets for some time to come as there is usually a timelag for labour market and wage growth pressures to start to fall.

Interest Rates 

In order to talk about inflation we have to look at interest rates too. The fund houses all agree that it is highly probable that Central banks still have more increases to make in order to combat the high inflation environment however, the views on how high these will go and when the rate rises are frozen seem to be softening. Some believe that this could be as early as Q1 of 2023 whereas others have forecast it will be closer to the end of the year.  It all depends on how quickly inflation starts to fall.

​Recession

In December, the general consensus was that there would be a global recession in 2023 however some market commentators are now suggesting that although we will see a global slowdown in growth, recession may occur in localised regions only and may not be as prolonged as initially forecast by the majority.

Outlook for 2023

We’ve seen a swing of sentiment within the fund houses’ views within the space of four to six weeks with many of the most hawkish commentators seeming more optimistic about the prospects for 2023.

Overall, the outlook for returns are muted for global equities and it is important to expect continued volatility as developed markets move into a new stage of the economic cycle. That said, fixed interest investments are looking more optimistic with yields now offering an income for the first time in years however quality will remain key for this asset class.

​It is also important to remember that as investors, we’ve experienced difficult market conditions before and we still believe that time in the market (rather than trying to time the market) continues to be the best strategy for longer term returns.  We remain confident in the ‘quality’ investment strategies by our active fund managers and stick by our belief that asset allocation and diversification is key to manage portfolio risk and returns.