June 22, 2022

Deploying Liquidity in an Inflationary and Rising Rate Environment

By Jonathan Unwin, Deputy Director of Asset Management and Advisory at Bank Havilland

2022 presents perhaps the most challenging environment for savers and investors in over a decade, as the triumvirate of runaway inflation, low interest rates and volatile capital markets means there is no There is no easy way to allocate liquid wealth.

With headline inflation in the UK already at 5.5% (a reading consistently above economists’ expectations) and the highest bank savings rate currently available at around 0.75%, it is clear that any deposit cash will see its value seriously diminish over time in terms of purchase. Power. Unfortunately, even cash, with its guaranteed decline in real value, remains more attractive than the bond market due to the fixed nature of the asset class’s income stream amid rising central bank rates in response. to post-pandemic inflation.

As bond yields begin to rise in earnest, after decades of compression, the potential for deeply negative total returns for a basket of sterling bonds is great as central bank support is turned off and the Bank of England increases base rates. Soaring bond yields, therefore, also make a passive allocation to the stock market an inadvisable idea.

In recent years, a generic holding in a market-tracking index fund has been a good strategy: inexpensive, quick and easy to invest, requiring minimal aftercare and, most importantly, double-digit returns (for a “global” ETF). ” standard). As we know, the main drivers of these returns have increasingly been provided by “megatech” growth stocks, some of which are already extremely profitable companies and some of which are “the stocks of tomorrow” but which have not not yet reached the break-even point.

What both sets of stocks have in common is the promise of high future cash flows, with an expensive valuation that comes with it. As bond yields rise, the relative attractiveness of these cash flows diminishes as they move further from the future, hence the aggressive selling we’ve seen in recent months on these long-term growth stocks. . Simply put, a passive global index tracker will cease to be the “no-brainer” investment it once was, and a more nuanced and selective approach is needed.

Property, long the preferred choice of British investors, will also be affected by rising inflation as the Bank of England is forced to raise interest rates. While the rising cost of living may not directly affect the wealthy, for many it will mean saving for a deposit will take longer while mortgages themselves become more expensive – with many of unprepared people at higher rates. This could have an upward effect on the housing market, meaning prices may not keep up with inflation either.

To Bank Havilland, we always promote liquid, multi-asset portfolios to our clients as the most consistent way to preserve long-term wealth, even in times of absent inflation, with truly bespoke portfolios available from 5 million pound sterling. An equity-dominated allocation remains the best way to weather the current environment, with a selective global approach capable of avoiding foamy parts of the market altogether.

For example, the focus on banking and mining stocks which can actively benefit from rising interest rates and commodity prices points to the UK market respectively, while domestic Japanese stocks do not face the challenges. inflationary pressures in other developed economies.

Alongside a highly selective equity allocation, we have expertise in identifying uncorrelated funds and strategies that offset normal market risk, including precious metals, commodities and non-directional vehicles. Our portfolios are positioned for the long term but can be liquidated on a daily basis, which, combined with the quick decision-making capability that comes with being a stripped down boutique bank, allows for a very agile investment process, should the context changes.

An agile, high-conviction approach to markets, within a traditional portfolio structure that actively seeks to exclude the most vulnerable assets, is the best way to deploy liquidity in an inflationary and rising-rate world.

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