The latest Financial Update from George Square Financial Management

THE BIG THREE

• 1) I told you I was serious

Last week brought the news of a 0.75% rate hike here from the Bank of England and the same across the pond from the Federal Reserve. Markets are noticing that inflation is growing more slowly than it was and are betting that it will soon fall sharply. For this reason, expectations keep building that these Central Banks will stop raising rates soon. But we should note that they have said very consistently that they will keep going until they are 100% sure inflation is beaten. There is good evidence it is starting to fall but they need more than that and until they have it we can expect interest rates to carry on rising.

• 2)   So, when will things recover?

This $1 million question is almost impossible to answer. We do know that we are heading for a recession but that it looks likely that on a global basis it will only be a mild one. The market has already fallen significantly and put that recession in the price. So we can be hopeful that a recovery is approaching. Whilst it is impossible to time such a move, we can describe the shape of it. We believe it is likely that the value of bonds will recover first. This is because bond investors have already taken the pain of higher interest rates and we do not see their price falling further.

• 3)   And what about shares?

We believe the recovery in shares may come later, perhaps sometime into 2023. We believe that the first shares to recover will be high-quality companies that have reliable earnings, even if they are a little dull. This will be followed by a recovery in faster-growing companies. In the meantime, we are clear on our strategy. We are taking advantage of the recovery in bonds that we believe will come first and we are continuing to own a strong weighting in US dollars which is the world’s safe haven in difficult times. These strategies help us both protect returns in difficult times but also to prepare to capture the coming recovery.

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