Limiting the shock: adjusting personal finances to market turmoil

Most UK investment managers spent the past week glued to their screens, watching the impact of the UK market turmoil on their funds. But a British hedge fund executive spent the week poolside in Dubai, worrying about his hotel bill.

“I was seeing my vacation getting more expensive every day,” he said. But his own concerns about sterling’s turmoil have been outweighed by the scale of the financial crisis sweeping London. “This really is one where we probably won’t see something like this again in our careers.”

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

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

“It will affect households in terms of inflation, higher interest rates and a more challenging mortgage market. . . and a move away from the point where inflation peaks,” says Richard Flax, chief investment officer at digital wealth manager Moneyfarm.

While some bold investors like to spot opportunities in a sell-off, the cloud of uncertainty already hanging over markets due to the Ukraine war, energy prices, inflation, and economic woes has only grown worse. dark.

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

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

$ per £ line chart showing British pound continuing

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

While the fall in sterling grabbed the headlines after Chancellor Kwasi Kwarteng’s speech, the mid-week drama in UK government debt was arguably far more significant for finance professionals and ordinary savers. .

UK sovereign bonds, known as gilts, saw some of their sharpest moves. “What we’ve seen is something of a crisis of confidence both in the gold market and in sterling,” says Peter Spiller, manager of investment fund Capital Gearing.

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Duncan MacInnes, chief investment officer at Ruffer, says gilts have seen “absolutely wild swings for a first world sovereign bond market.”

The BoE stepped in after price declines posed a serious threat to pension funds that use special strategies known as liability-driven investments (LDI) to manage risks.

The yield, the interest rate that rises when prices fall, on the UK 30-year gilt, which hit a 20-year high of more than 5 percent on Wednesday, fell to 3.85 percent on Friday by the 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 continue to bet on further rate hikes by the central bank. “At this stage, they have only added to the confusion,” says MacInnes.

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

Will mortgage fears fuel the cost of living crisis?

Government debt markets are important to households because they lay the foundation for mortgages and other personal loans.

Loydon said clients were beginning to grapple with the looming “massive shock” of the rate hike and asking questions.

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

The turmoil has made it difficult for suppliers to price new fixed-term deals, with thousands of products withdrawn. Around 600,000 fixed-rate mortgage deals are set to expire at the end of the year, with 1.8 million due for renewal next year, according to UK Finance.

The government’s energy price cap has somewhat mitigated the immediate cost-of-living crisis, limiting the expected maximum rate of inflation in the coming months to around 10 percent. But utility bills continue to rise, and as Trus’s economic plans are likely to expand public borrowing, the upward pressure on inflation may last longer.

While many affluent households that make up the wealth managers’ client base will benefit from the end of the top 45 per cent rate of income tax on earnings in excess of £150,000 per annum, and the reversal of the increase in dividend tax, these gains will, for many mortgage holders, be offset by higher interest rates.

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

Meanwhile, wealth managers say clients often underestimate the impact of the pound’s moves. While the British pound had made up most of the lost ground by Friday, trading around $1.12 per US dollar, up from a low of $1.03, it is still seen as fragile. Much depends on how the government reacts in the run-up to the announcement of its fiscal plan scheduled for November.

“A devaluation of the pound is inflationary and means the cost-of-living contraction is going to get worse,” says Edward Park, chief investment officer at Brooks Macdonald.

What should I do with my wallet?

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

“If you’re a sterling-based investor with a well-diversified portfolio, weak sterling is helpful,” says Janet Mui, head of market research at wealth manager Brewin Dolphin.

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

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

But the uncertainty in the UK underscores the importance of diversifying away from the domestic market. The majority of UK retail investors allocated more than a quarter of their portfolio to British stocks, according to a Quilter survey last year, despite the country accounting for just 4 percent of the MSCI World Index.

The UK’s FTSE 100 Index itself provides global exposure, as its companies derive 80 per cent of their revenue from abroad. That gives exposure to foreign currency, but still limits companies’ choice, especially as the UK market is heavy on energy and mining and thin on technology.

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Wealth managers say their clients are also concerned that higher borrowing costs will threaten home prices. “Over the last few decades, property has been something you can live in and doubles as your diversified investment portfolio,” says William Hobbs, chief investment officer at Barclays Wealth & Investments. The market crisis has called into question the assumption that house prices will rise steadily, he argues.

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

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

Meanwhile, investors should be careful about investing in companies that have a lot of debt, as borrowing costs are rising rapidly. “Debt is how you get into trouble, whether you’re an individual, a company or a country,” says Christopher Rossbach, managing partner at J Stern & Co. He recommends examining corporate balance sheets.

Gold, the traditional safe haven, has performed well as a hedge in sterling terms, rising around 16 percent in the last 12 months. But it is down in dollar terms, suggesting there may be better ways to hedge. “I would be very wary of those who tell you that whatever the question is, gold is the answer,” says Hobbs.

Gold also doesn’t pay income, so it becomes less attractive as interest rates rise. Although bonds have fallen sharply this year and the UK bond market has been in turmoil this week, in the longer term, higher yields are starting to make investors reconsider debt instruments.

“We have a lot of clients who, in my opinion, have too much cash,” says Winter. “Now it’s possible to have a fairly diversified portfolio of high-end corporate bonds yielding around 6 percent.”

Savers who want to hold onto cash, despite the threat of inflation, are advised to shop around for the best rates, as banks vary and many high street lenders have bad deals.

The return of decent interest rates on deposits and bonds equates to a big change for savers. MacInnes says, “That’s a profound change in the investment landscape that came out of nowhere in the last six months.”

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