At InvestEngine, a key focus for our investment team currently is inflation and what central banks like the Bank of England and US Federal Reserve are doing to try to tame it.
Over in the US, the bellwether for global financial markets, the latest consumer inflation measure is 8.6% and investors understand the Fed has no choice but to keep raising rates.
The Fed’s credibility for bringing down inflation has already been brought into question by its view last year that increased price pressures were only “transitory”. This month’s (June) 0.75 percentage point increase in US interest rates should therefore be seen as part of an ongoing series of rate hikes, rather than a solution in itself.
In the UK, the Bank of England is also firmly on the path of increasing interest rates, with a fifth hike this month (June) taking the base rate to 1.25%.
In the Eurozone, the European Central Bank has been slower to move but now plans to start raising rates from July.
With the InvestEngine Growth portfolios, while our long-term investment strategy remains unchanged we have nevertheless made some adjustments to address the current risks in markets.
We have reduced our overweight exposure to UK shares. We have profited in recent months from this overweight position which we took back in December, with the energy and mining focus of the FTSE 100 helping performance relative to other markets. However, we are now more neutral on the UK given concerns for the economic outlook over the rest of this year.
By contrast, we have increased our US exposure to neutral from underweight previously.
The US market’s losses so far this year mean it is now less over-valued and we think it is less likely to underperform going forward. However, we have further cut our exposure to the tech-heavy Nasdaq index and continue to prefer US exposure via the S&P 500 index.
In fixed income, we’ve made bigger changes in our Growth portfolios and have added two new ETFs to invest in longer-term bonds (iShares Core UK Gilts and iShares USD Treasury Bond 7-10Yr).
Overall, we remain underweight to bonds in what has proven a difficult year for fixed income investments because of rising inflation.
We continue to have exposure to inflation-linked bonds, which has helped to offset our wider bond losses.
But with the UK and US further ahead in their rate tightening cycles than other markets, we also see an emerging opportunity in UK/US long bonds.
Yields on these bonds have increased to reflect the rate tightening. But should interest rate increases prove slower than the market expects, these bonds could benefit from capital growth as their yields come down.
Our investment team continues to monitor the proposition and market developments on a daily basis.