On Thursday 13th October, Ryecroft Glenton arranged for Cazenove Capital Management to deliver a webinar to bring business owners up to date with the key current global investment issues that will affect business decisions, with a particular focus on interest rates and currency movements.
The webinar was recorded and is available on our events page if you would like to view it (viewing time is 40 minutes excluding the Q&A session at the end). Please scroll down the events page to where it says ‘Recent events’ to find the video https://ryecroftglenton.com/events/
The main ‘take aways’ from the webinar were:
Future path of interest rates – changing expectations month on month
Back in October 2021, the consensus market expectation was that the Bank of England base rate would reach 1% by now (October 2022), that the US Federal Reserve base rate would be 0.5% and the Euro base rate would be -0.5%.
These expectations have proved to be incorrect as a direct consequence of rising inflation and they are being revised upward month on month. The current expectations are that central bank base rates in 12 months will be over 5% for the UK, 4.5% for the US and 3% for the Eurozone.
However, if these projections prove to be as short sighted as those made 12 months ago, and interest rates have to rise even further and remain high for a prolonged period of time, the global economy might suffer a longer and deeper recession than is currently projected.
Currency movements
The sterling /dollar exchange rate has dominated the UK press since the dramatic foreign exchange market reaction to the UK Chancellor’s Mini Budget in September. The market consensus appears to be that sterling will continue to struggle against the dollar while investment risk appetite remains depressed. The reasons for this view are that traditionally investors have flocked to buy the dollar during periods of stockmarket stress such as that currently being experienced, the US is also currently offering a more attractive rate of interest than the UK and finally, the US economy is seen as more resilient than the UK economy.
UK inflation outlook
The implications of the energy price cap on inflation were discussed, with the point being made that whilst the price cap is expected to lower the short term inflation peak compared to prior expectations, it could result in higher ‘core’ inflation in the medium term (‘core inflation’ is defined as inflation after stripping out energy costs) than had previously been expected, as a consequence of businesses and consumers having more money in their pocket to support continued demand.
Energy crisis
Although the price of oil has fallen gradually over recent months, the price of natural gas is still much higher than it was before the Ukraine invasion, with the consequence that EU household energy bills are expected to reach 15% of average gross disposal income by the end of this year and almost 25% of average gross disposal income by 2023 unless prices start to fall back. This compares to 8% of average gross disposal income in 2021 and will have a significant impact on how much consumers will be able to spend elsewhere.
The longer term drive to cleaner energy, which is likely to see natural gas preferred to more polluting forms of energy such as coal and oil, is expected to see natural gas demand increase in the medium term, which could underpin higher prices for years to come.
Business and consumer sentiment
US consumer sentiment indices have fallen sharply this year, with a knock on impact on US mortgage demand and we are now seeing a similar picture play out in the UK with the spike in mortgage interest rates of recent weeks.
Both US and UK business confidence has also weakened materially, with US business confidence currently mirroring the lows experienced in March 2020 at the onset of the COVID pandemic.
Recession expectations
Market indicators appear to point to all major economies entering recession in 2023, with growth data for 2022 already materially weaker than in 2021. The length and intensity of recession will depend on how much higher interest rates need to rise to combat inflation: consensus expectation is that the US Federal Reserve will continue to lead the rest of the world with interest rate rises and that when the US Fed considers it appropriate to stop hiking interest rates, this could mark the turning point and act as a catalyst for an upturn in investment appetite.
Ryecroft Glenton registered to carry on audit work in the UK and Ireland and regulated for a range of investment business activities by the Institute of Chartered Accountants in England and Wales. Details about our audit registration can be viewed at www.auditregister.org.uk, under reference number C006313267. Portland Financial Management is authorised and regulated by the Financial Conduct Authority, FCA firm reference number 114370. Tax treatment depends on the individual circumstances of each client and may be subject to change in future. Please remember the value of investments and the income from them can go down as well as up. You may not get back the full amount you have invested.
This material is published for the information of clients. No action should be taken without seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.