Speaker 0:
well as we came into 2023 I was really quite hoping for a calmer year, a quieter year than we've had in the previous three, which have been really quite volatile across all different asset classes, although that was soon thwarted as we came into the year, what we call macroeconomic factors. And

Speaker 0:
by that we mean interest rates or expectations for interest rates and inflation and economic growth. They were the main driving factors for asset prices across all different asset classes. And what happens when we're looking at economic data like that is it can create quite big moves in the price of different assets.

Speaker 0:
And as we came into this year, the view was starting to form that we were getting somewhere near the peak of inflation, which meant we were getting somewhere near the peak in interest rates. And as a result of that, bonds and stock markets within bonds and stock markets, the most sensitive assets to falling interest rates and falling

Speaker 0:
inflation, or at least slowing inflation started to perform quite well and the volatility was created every day. We're looking at different economic data, points, drive prices and then as we moved into March. Clearly we had the issues in the banking sector and I'm sure we'll come on to talk about those in a moment or two

Speaker 0:
had had pretty significant impact and that sort of exacerbated everything. The view that interest rates had peaked was accelerated. The view that inflation would therefore maybe fall a bit faster had therefore exacerbated as well, and that created even greater volatility within markets and on top of that, because of the problems in the banking sector, people started to think that credit conditions would tighten and what we mean by that

Speaker 0:
is it's going to be more difficult for companies and for people to borrow money. So people started worrying about the economic outlook as a result of that. So all these macroeconomic factors and issues in the banking sector all came together to create volatility within markets, and it was both upward and downward volatility. It was within market indices, but also within different parts of the market as well was a bit of a problem.

Speaker 0:
I think it's impossible to say that the problems in the banking sector are all over. It was starting to be termed a banking crisis back in March when we had the issues with the regional banks in the US and Credit Suisse probably more particularly a much larger scale. However, it continues to rumble on nearly all in the US at the moment, but we're still seeing problems in the regional banking sector. The most important thing, though, is that we are seeing support

Speaker 0:
from the Federal Reserve, the US central bank and also by the large commercial banks in the US who are willing to buy some of the loan books some of the assets of the banks that are struggling, so a lot of support there. The problem is that banking is an industry, or certainly in terms of stock market and investors built on confidence. And when confidence starts to fall away from a bank, that's when you start to get a run on the bank. I'm sure people remember those scenes we had with no

Speaker 0:
than Rock back in 2008, which are really quite evocative, is not quite bad these days because people use their phones and their mobile devices to move their money around. But confidence matters, and therefore we can't say it's over. I think There's also worries around the real estate or property market in the US has resulted as well, so it will go rumbling on. But I think to call it a crisis is going too far. To say it's over is also going too far as well.

Speaker 0:
A focus on these macroeconomic factors just continues and the two key ones are inflation and our interest rates. I think it depends on what region we're talking about when it comes to whether rates have peaked and inflation's peaked or is at least sort of slowing. And I think first of all we've got to look at the largest economy in the world, the most important economy in the world, which is the US. Inflation has been coming down or the rate of inflation has been coming down for quite some time now

Speaker 0:
and equally we've just seen the start of May the US Federal Reserve increase the base rate there to five and a quarter per cent by 25 basis points or 0.25 per cent.

Speaker 0:
I think it's quite possible that that might be the last rate rise in the US, but that's probably just pushing it a little bit too much. Certainly the way the Federal Reserve are talking is saying, telling people to expect more increase increases in rates if inflation continues. So I think it's possible we've seen it there. If we go to continental Europe again at the start of May, we saw the European Central Bank increase interest rates by 0.25 per

Speaker 0:
per cent. I think it's likely that they will carry on up in Europe as well, because their inflation, it doesn't appear to be nearly as under control as it is in the US We get to the UK, which is probably what we're all living and looking at the most again. The Bank of England put up interest rates by 0.25 per cent in the middle of May. But inflation here, as I speak, is still in double digit numbers and therefore

Speaker 0:
I think it's likely that we will see ongoing interest rate increases in the UK and so we've got some certainty that inflation's beaten. It will start coming down just mathematically as you get price increases in the energy sector falling out over the course of the next few months. We should worry about core inflation. We should worry about the inflation and food prices and also in clothing, so it depends on the region. I think it's too early to be definite on anything.

Speaker 0:
I think the world economy and most regional economies, for that matter in surprisingly good shape.

Speaker 0:
I think the worry is what's going to happen over the coming months. I think they've withstood really, quite well the increase in interest rates and inflation and also supply chain issues, the fallout of covid, et cetera, et cetera. I think they cope with that quite well. So far, the problem got is something called policy lag. And what that means is how long it takes for the impact or full impact of an interest rate rise or indeed, cut to have an effect on the economy. Some evidence and

Speaker 0:
it suggests that it can take between 12 and 18 months for a policy change or interest rate change to have full effect on the economy. And given that it wasn't that long ago, we still don't even know the real effect or the first interest rate increase, let alone the second, the third or the fourth, and that's all likely to come to fruition through the rest of this year. So I think there's quite a lot of uncertainty for economic growth which has been slowing just about everywhere for the future. Yes, I do think there's a risk of recession.

Speaker 0:
I think the question to me is more about how deep or the recession might be, how long the recession might last. However, I think there's lots of reasons still to be positive. The robustness of the economy is really important. China is coming out of coming out of covid and lockdown

Speaker 0:
is reopening, which is a really good thing for the second largest economy in the world. India continues to remain quite robust and crucially, the US economy remains quite quite robust as well. So I can't paint a rosy picture of the economic outlook. But I think we can have a level of confidence that things aren't going to be too bad.

Speaker 0:
I think it's very important to remember that that financial markets, when they're pricing different assets, whether it be bonds, equities or stock markets, gold or whatever it might be currencies, even they go through what's called a discounting mechanism. In other words, they discount what the future might hold. And by that, what we mean is the expectations for whether it be interest rates, inflation,

Speaker 0:
economic growth, company profitability All those things people take, estimate what they're going to look like, and therefore stock markets and bond markets and other asset prices should reflect future expectations. That's what's called discounting. So therefore, to some extent, if everybody's right, then stock markets and bond markets and all the other asset prices are probably about right At the moment. The problem is that that doesn't usually happen and expectations

Speaker 0:
are thwarted to one degree or another. As we sit here now, an awful lot of commentators and fact market prices are expecting interest rates in the US to start falling away or coming down at some point this year that we are near that peak. If that doesn't happen because inflation remains robust, I think a bit of a gap there and I think there is a risk to two asset prices across the full range,

Speaker 0:
you know, but again, because this discounting mechanism does work because we are factoring in what we're expecting to happen, I think the longer term prospects are really sort of quite good. I think the medium term the rest of this year is a little bit more problematic.

Speaker 0:
Um, well, clearly, we're talking about eight growth portfolios and and three income portfolios, all of which have got different risk return profiles and and and all around the same sort of approach with different risk return profiles and expectations. Um, and however, I think it is reasonable across all of them to to characterise what's done well and what's done less well for us over that period.

Speaker 0:
It has been a difficult period in which to invest, and I mentioned earlier on about how markets have been driven by macro economic data points by macroeconomic views and expectations. Within all that, our bond portfolio is first of all, the best place to start. We've got little interest rate sensitivity in those. So in other words, what we mean is we hold bonds are relatively low risk, which shouldn't move much up or down as

Speaker 0:
interest rate expectations change now. Clearly, the expectation for interest rates has changed quite considerably in the early part of this year, so our exposure within the bond portfolios that we hold has been not as good as it could have been, probably the best way to put it

Speaker 0:
within the equity portfolios or company share portfolios. We've had little exposure to the to the fans, and I already run through what we mean by the Fangs and they really have driven valuations and driven indices. It's quite interesting because these companies now so big Apple and Amazon are sort of the obvious to talk about here,

Speaker 0:
that they actually drive the indices, whether it's the S and P 500 index in the US and bear in mind, that's a very good representation of what happens in the US stock market overall. Or in fact, if you were to look at even something like the MSCI World Index, which is the whole world stock market and pretty much all put together, these are big enough to drive those index

Speaker 0:
levels. So if you think that sort of stock markets have done well, that would be true. But what it does mean is that a very small number of very large companies have done very well, having not had too much exposure to those very little exposure to those it means the things that we've been invested have done less well, relatively, so that's been a little bit a little bit difficult.

Speaker 0:
The exposure that we've got to the property sector is via property companies, so we don't hold physical properties. We don't invest in buildings. We invest in companies or other funds that actually invest in buildings or manage buildings themselves. That's been very difficult over the course of the last 12 months or so, as rising interest rates has impacted upon those fears of recession has impacted upon those

Speaker 0:
equally our exposure to what we call alternative assets. And what we mean by that is asset classes that are expected to be lowly, correlated to the main asset class of bonds and equities. In other words, they behave differently, perform differently. They don't perform in the same way as those more

Speaker 0:
traditional asset classes. That's been a slightly different, more difficult area to invest in as well. So it's been a tough start to the year. Interestingly, when we got through the issues, the banking sector, or moving through it rather rather than finished,

Speaker 0:
um, April has been a much better month for us, and as we move through at the moment, we sit here as we're talking sort of. In the in the middle of May, uh, things are going much better. Markets have been much calmer, less driven by these macroeconomic factors. So it's been a tough start. However, we're very happy with the position of the portfolios as they stand at the moment.

Speaker 0:
I think it's worth remembering that all the investments within all these portfolios are actively managed. So we will be doing something every single day within. It might be topping or tailing individual positions, making small changes, taking profits or investing in undervalued assets because an opportunity

Speaker 0:
crops up and overall been fairly happy with the exposure we've got. But we have made two changes to the actual asset allocation through the course of this year so far. The first one of those was to reduce the exposure to stock markets. That was back back in March, and the reason for that was we got more worried about recession, more worried about the valuation levels that I spoke about, with these large companies performing very well and pushing market level

Speaker 0:
higher, and we increased the exposure to bond markets, particularly to corporate bonds or bonds issued by companies in the UK and Europe and some in America as well. And we saw that a little bit as a de risking exercise. Part of that is we think the returns that are available from the bond market or that part of the bond market are quite attractive relative to the risk of being taken. We felt the risk of inequity markets was a little bit a little bit higher.

Speaker 0:
Interestingly, though, if I go and speak to the fund manager actually picking the stocks themselves, they will tell me about the amazing opportunities they're seeing at the moment. The companies they hold, they think are absolutely fantastic for the long term. You ask them, would I buy them today and they take a little bit of a step back to say, Well, valuations are a little bit high overall So that was part that helps frame our thought process allocation level, whereas the bond fund managers they are seeing things they're very happy to buy at the moment.

Speaker 0:
The second thing we did and that was all done at the lower risk end of the risk portfolios and also in the income portfolios. The other thing we did more recently the higher risk portfolios was to reduce the exposure to our global equity exposure overall and put that

Speaker 0:
money into emerging markets specifically. But we do think there is a really interesting long term opportunity there, so that was quite interesting, quite specific what we did and we only did it in the higher higher risk portfolios. And so what we've done effectively take a little bit more risk in the higher risk portfolios and a little bit less risk in the lower risk portfolios.