Accelerating Trends

Alastair Power, Investment Research Manager

At the time of writing, more than two months into the conflict, the US-Iran war has seen limited signs of de-escalation. The Strait of Hormuz briefly reopened, before closing again following announcements of a US shipping blockade, likely implemented to leverage negotiations through the application of further strain on the Iranian economy. Oil prices have remained volatile, trading above, and sometimes below, the US$100 per barrel level throughout the conflict. Meanwhile, risk assets, indicated by equity and corporate bond markets, continue to trade at elevated valuations, with ongoing positive sentiment around the future benefits of artificial intelligence, but also a potentially more complacent view around the level of energy supply chain disruption.

Inflationary pressures persist
The effects of the 2022 energy driven inflation shock remain a recent memory, with a repeat being a viable concern. The latest UK Consumer Price Inflation (CPI) release shows the annual rate falling from 3.3% in March to 2.8% in April, with lower energy prices, as a result of a change to Ofgem’s energy price cap, the largest contributor. However, inflation remains well above the Bank of England’s 2.0% target, and the full impact of the conflict in Iran has yet to affect the official inflation number. Whether the current scenario is a repeat of 2022, however, remains to be seen. Four years ago, the UK was experiencing already elevated levels of inflation across goods and services, with strong levels of wage growth. The energy price shock triggered by Russia’s invasion of Ukraine exacerbated an already inflationary environment. The current scenario is somewhat of the opposite with a reportedly softening labour market and services inflation, alongside a weaker economic growth outlook.

Keeping one eye on interest rates
The outcome of the 30^th April meeting of the Monetary Policy Committee (MPC) at the Bank of England, which holds responsibility for setting interest rates, was as widely expected. The MPC vote 8-1 in favour of holding interest rates at 3.75%. Recognition was given to the inability for monetary policy to affect global energy prices. However, there was indication of action being required if second round effects, such as goods and services price rises, prove more persistent. The duration of the conflict, therefore, remains key in determining the future path of interest rates with very short-term government bond yields indicating expectation for one interest rate rise this year to 4.00%.

Impact on consumer confidence
Timing of the conflict and energy price increases has been challenging, with consumers already feeling the effects of rising costs such as utilities and council tax. Add to that, higher fuel prices along with the prospect of remortgaging rates, and the outlook becomes gloomier. News of Deloitte’s Consumer Tracker, showing overall consumer confidence declining to the lowest level in three years, is thus unsurprising. If sustained, the effect could see yet an even greater reliance on wealth transfers within families as younger generations seek to achieve financial stability ambitions and an improved lifestyle.

This month on our Latest News page…
Ahead of the upcoming 10-year anniversary of the Brexit referendum, our Brexit 10-years on: Taking a long-term view article, looks at how political events can impact financial markets, and the importance of maintaining a long-term investment perspective.

Our Stock Focus article considers where a long-term investment approach is still preferred, and Finsbury Growth & Income Trust (FGT) investment trust goes under our microscope. More recent performance has proved challenging for its manager who continues to stick to his focused, long-term orientated strategy of investing in high-quality UK listed companies.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. Investments and income arising from them can fall as well as rise in value. Past performance and forecasts are not reliable indicators of future results and performance. The information and views were correct at time of publishing but may have changed at point of reading.