We recognise that not all clients will have experienced the full period set out in our previous blog here, or indeed experienced precisely the same investment path, depending on precisely when investments were made. Even a relatively short gap of a few days or weeks can make a significant difference to medium-term returns.
For this reason, reporting returns on a straightforward calendar year basis provides the fairest and most all-encompassing picture. Always remember you can get in touch with your adviser if you would like a more personalised picture of your investment returns.
The general investment environment, not to mention the state of world affairs, has changed dramatically in recent years compared with the few years prior.
For much of the 2010s, the aftermath of the global financial crisis, coupled with the effects of a highly globalised world, meant that both economic growth and inflation remained resolutely low in most developed countries around the world. In turn, this allowed for interest rates to be cut to their lowest-ever levels – barely above zero, and often even below it (!) – in many countries. This boosted market returns.
Asset prices tend to benefit from low interest rates for a few key reasons:
o Low rates mean that stocks, bonds and other assets have less competition from cash for those seeking a return
o Low rates boost profit margins when companies borrow to invest
o Low rates encourage borrowing and thus consumer spending, supporting demand in the economy
However, as is well-known by now, the after-effects of supply chains damaged by COVID as well as the devastating disruption to food and energy markets caused by the war in Ukraine have sent the low and stable inflation of recent years sharply into reverse. (This is of course, also not to mention the damage caused to markets by these events in their own right, not just their inflationary effects.)
Other factors, not least increasing tensions with China, have also added to inflationary pressure by rolling back some of the free and easy trade the global economy had come to enjoy in favour of greater restrictions aimed at boosting national and economic security.
An environment in which inflation and rates are rising is naturally more challenging for markets – especially so when the change of trend is taking hold. We are thankfully past that point now and can expect to see further falls in inflation, coupled with cuts to interest rates, starting at some point next year.
