Remember, remember, the month of November, inflation, debt, treason and plot! This week could well see an interest rate rise, most likely referencing inflation and consumer debt levels. In addition, in three weeks’ time, we are likely to experience a government debt constrained budget, which will no doubt be ripped apart. As to treason and plot, Spain is providing a fair dose, whilst the political infighting in the UK and the US is ever present.
The markets believe that on 2nd November, the Bank of England will return interest rates to 0.5 . If so, it will be the first interest rate rise in ten years. We view this as mostly symbolic, however, and its impact will be limited. With stronger than expected growth figures released last week, Mark Carney can reverse rates and provide a little ammunition against rising inflation, with credibility intact.
How will this rate rise affect markets and, more importantly, which investments should one consider at this time of year, and which ones should be consigned to the bonfire?
Our negative sentiment towards fixed interest remains, although we believe this should have been sent to the tower some time ago! A marginal increase of 0.25 is not going to make this asset class any more attractive, especially when any move is largely priced in. The yields remain unfavourable, with the 10-year gilt yield currently standing at around 1.3 - a negative real return.
We don’t believe an interest rate rise will cool the UK stock market. There are opportunities in value stocks, recovery stocks and businesses that favour consumer goods, which are essential for any well diversified portfolio. The power of brands should not be underestimated; these companies often offer attractive dividend yields, which are generally resilient, even in downturns.
Observing the hottest areas, Bitcoins have performed well, but do all investors truly understand the pricing mechanics of this market? However dazzling the performance may be, there is always a risk that it could blow up in your face! Of course, it is fascinating to read stories that somebody who bought £2,000 worth of Bitcoin 5 years ago is now a millionaire. However, the reality here is, even if the price continues to go up, we believe there are other asset classes that can also perform well, which are significantly less opaque. It is always easy to look back with hindsight, but the same can be said of any investment that performs well.
Some investors in Bitcoin may also not be aware that there are tax implications. Just because something is unregulated does not mean you don’t pay tax. This may make investors reluctant to sell their holding in Bitcoin because they are sitting on healthy profits and don’t want to be stung with capital gains tax. This is the mistake that many made back in the dotcom bubble, and rather than realising taxable gains, they were hung, drawn and quartered when it collapsed.
US markets are, on the whole, priced for tax policy perfection. They are expensive, as highlighted in the last weekly; highly efficient, lofty valuations, along with the weak sterling means no treats, only tricks. This isn’t to say that everything within the US is necessarily worth avoiding. Despite these market highs, technology companies continue to race ahead and surprise the markets. Amazon, Alphabet (Google), Microsoft and Intel results all succeeded in surpassing market expectations.
Whilst many stock markets are reaching all-time highs, one which we remain favourable towards is Japan. Shinzo Abe won the snap election, bringing certainty to Japanese economic policy; many experts believe that their economy has plenty of room to grow.
The central bank of Japan has also reiterated their commitment to a loose monetary policy until inflation rises – this will undoubtedly be a benefit to their stock market. A relatively weak yen also provides a compelling investment case. Even if the Nikkei seems high, it is important to remember that it is still only half the value it was in its heyday back in the 1980s. Those nervous of reaching new highs may find this appealing.
Of course, Japan isn’t completely risk free, especially with Kim Jong-Un on the doorstep, threatening his very own firework display. This feels like the biggest potential risk on the table currently but even if that ‘event’ should transpire, most investors are looking for buying opportunities, having an abundance of cash rather than the opposite. Any sell off will likely be short-lived.
Guy Stephens is technical investment director at Rowan Dartington.
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