Lower-than-expected government borrowing may hand the chancellor “wiggle room” to support the British economy during the worst cost of living crisis in decades, but investors and voters shouldn’t expect a “free lunch” in the chancellor’s spring statement today.
That’s the view of Morningstar EMEA’s chief investment officer Mike Coop, who says Rishi Sunak will be mindful of the effect of stimulus on the Bank of England, even if the government’s own waning popularity is hiking political pressure on Whitehall.
“The Budget should be viewed as part of a fiscal-monetary policy ‘double act’, which so far has buoyed asset prices with huge spending and very low interest rates,” Coops says.
“We expect more generosity than usual this year [based on] the government’s loss of popularity, the upcoming council elections, more money than expected in the government’s coffers and spiraling cost of living. However, the chancellor must remember that more government stimulus will put pressure on the BoE to raise rates so we don’t expect a free lunch of giveaways.”
Insurance in a Flood
Chief among voters’ concerns will doubtless be inflation and the cost of living crisis, amid fears the UK’s inflation figures will smash through the 7% mark. Inflation has just hit a 30-year high of 6.2% in the latest February figures from the ONS. But if there isn’t a silver bullet today (and there won’t be), it’s all the more important to understand how to position your portfolio. For investors, however, it’s a particularly tricky topic, and for two reasons:
– Experts’ predictions on inflation have often been proven wrong
– You may already be too late
As such, preparing for a single inflationary scenario is foolish. And, as Coop says, inflation isn’t only visible in the economy. The cost of buying protection has spiked too.
“Inflation-linked assets, such as commodities and inflation-linked bonds can provide protection from unexpectedly high inflation at a cost, but that cost has risen dramatically as investors have flocked to them and inflation itself has risen dramatically,” he says.
“Buying them now is akin to buying insurance during a flood.”
As such, it’s been much more profitable for investors to retain a focus on equities and identify undervalued assets. That way they can avoid betting on inflationary scenarios.
Morningstar Investment Management runs a range of portfolios for financial advisers’ clients. This is precisely the approach the company is sticking to in these heady days of volatility and uncertainty.
“In our portfolios we favor UK equities, energy equities, financial equities, high-quality companies with pricing power and emerging market debt with US government bonds and the Yen as ‘risk-off’ diversifiers for when corporate profits are at risk,” Coop says.
“Specifically, we see UK equities, German equities, Latin American equities, financials and emerging market debt as examples of better opportunities with diversifiers including high quality companies with pricing power to deal with further inflation shocks and high quality govt bonds for slowdown, recession and shock scenarios.”
Wrong Place, Wrong Time
Finally, MIM reminds investors just how disastrous it can be to attempt to time the market. This was the message of an interview with MIM global chief investment officer Dan Kemp two weeks ago, who warned of futile attempts to make a quick buck on hopes of peace.
“Our own research on flows show that investors detract value when switching in and out of funds so their attempts at market timing leave them worse off,” Coop says.
George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.