I thought it was important to provide an update as we seem to have turned a corner with inflation.
As you might have seen, the latest inflation number was promising and meaningfully better than expected. Inflation is coming down, with the job market broadly holding up. This is true locally and globally, even if weāre seeing different speeds of change.
Weāve seen sentiment change from a state of worry to a more neutral position. We welcome the recent downturn in inflation and have great faith in the long-run capability of your portfolio.
Looking ahead, the one enduring change that stands out to us is the better ability to generate passive income. Cash rates are obviously much better now than at any time in the last decade, but bonds are arguably just as good, if not better, with the ability to lock in yields well above 5% for many years. This is a net positive and something we anticipate your portfolio will benefit from.
A crucial question in the conversation around inflation is: What are the investment implications if the next 10 years feature consistently higher or lower inflation and interest rates?
We view this as investors, not economists, so remain open-minded about the different paths that might happen from here. If inflation proves sticky, we have assets that can do well, including exposure to value stocks. If inflation falls back to target quicker than expected and stays there, we have assets that will do well too, such as government bonds and stocks more broadly.
Itās important to remember than not everything in a portfolio is expected to go up at once. If everything is going up, thatās obviously great news, but it can highlight potential problems with the construction of your portfolio. A truly robust portfolio should have offsets against different environments and there should be things that arenāt working as well as things that are.
Yes, cash is attractive, but it has stiff competition. We do not have to look very far to find alternatives to cash that hold up to better scrutiny. For example, short-term government bonds, which are currently offering similar yields to cash, would benefit from a fall in rates and, unlike cash, they have ādurationā which gives us a better ability to lock in higher yields for an extended period of time.
We welcome any dialogue on the long-term potential of the assets we hold, so please reach out if youād benefit from a conversation. In the meantime, we continue to watch developments with interest and will keep you updated if anything requires your attention.
Regards,
John Sangster ā Chartered FCSI, BA (Hons)
Director ā Chartered Wealth Manager ā Head of Investments
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