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Almost in a flash, it would seem, we have reached the half-way point in 2023. A time to catch our collective breath and reflect on the last 6 months of economic and investment activity. Then, fully refreshed, we can launch into the rest of the year.

In addition, as promised in the last newsletter, we will look at possible solutions to the UK’s main economic problem which we covered in the last newsletter. In short that real wages have been stuck since 2007. In fact, the office for National Statistics’ Real Average Weekly Earnings Total Pay Index remains marginally below it’s 2007 peak. To conclude we will look at a tool that may allow us to predict future investment market movements.

First, we will have a brief look back at 2023 so far. The year began with many Wall Street strategists believing that the S&P 500 index was due for a fall. Six months later it has returned a healthy increase. This result has been replicated across the globe with the MSCI All-Countries Index delivering a total return of 14.3% (although only 8% in sterling terms due to the stronger pound / weaker dollar situation). The primary driver for this growth has been technology shares. In fact the Dow Jones Industrial Average (which is not laden with tech stocks) has only managed to eke out a return of 3.8% so far. On the bond front it has been a struggle with the Bloomberg Global Aggregate Dollar Index managing a gain of only 1.43%. From a balanced portfolio perspective (the type of portfolio most investors prefer), the FTSE Private Investor Balanced Index was up 3.45% at the half-way point. That’s a perfectly respectable annualised return of 7%.

Looking ahead into the rest of 2023 it looks like it will all be about the after effects of inflation and interest rate increases. The collective view is that we are waiting for “the most anticipated recession in history” – which remains reluctant to reveal itself. Probably best to stick with the balanced approach I suggest.

The ‘elephant in the room’ continues to be interest rates, specifically those which apply to mortgage holders. More on this later in the newsletter. But as a brief taster the best 2 year fixed rate offering below 60% loan to value on 30th March was 4.10%, it is now 5.64%. For an equivalent 5 year fixed rate on the 30th March you could have achieved 3.99%, now you will pay 5.28%. If you need to borrow above 60% Loan to Value, then you will be paying more. In some cases, a lot more. With 100,000+ mortgages coming up for repricing every month this will have an effect.

To return to our main theme – the UK’s disastrous economic performance over the last 15 years, which has caused the stagnation in real incomes. Or to put it in terms of an Agartha Christie play (the Mousetrap celebrates it’s 70th anniversary this year) “the mysterious affair of the faltering economy “.

The consequences of which are plain to see: people are struggling to make ends meet; taxes are high – yet public services are overloaded; fights over shrinking economic resources are resulting in widespread strikes. All this at a time of low unemployment, so we cannot just wait for the business cycle to rescue us. The Bank of England’s chief economist, Huw Pill, recently took a somewhat fatalistic approach to this area. Apparently declaring that people in the UK simply need to accept that they are worse off.

But if we could somehow improve the UK’s productivity growth rate, all of these problems would be easier to solve. We could return to the business-as-usual of each generation being able to earn more than their parents, while working less and enjoying better conditions. But how?

We need to start with a diagnosis of what ails the UK economy. The view from the right is that the UK is suffering from excessive taxes and red tape. This seems implausible, plenty of the richer economies in the world have high taxes. Neither is red tape to blame, according to the OECD the UK’s product market regulations are amongst the most competitive in the world. The view from the left focusses on inequality. But this is an old and mostly separate problem. In fact, income inequality in the UK is slightly lower now than it was in 2008 and has hardly changed in the last 25 years. The real inequality is between London and the regions. The centrist critique is that Brexit is to blame. There now appears to be general disillusionment with the aftermath of the 2016 referendum. But this decision cannot be blamed for poor productivity results which began around 2007. Brexit has certainly solved nothing and is making the situation worse, but the UK’s economic problems became apparent long before the referendum.

In truth taxes, regulation, inequality and Brexit can all take a little of the blame, along with a gaggle of other culprits. These include the poor quality of management in British companies (the worst in the G7), the poor investment in infrastructure (the lowest in the G7), low investment from the private sector and the educational system. The latter works well at the top, but schooling is patchy, and many young people are poorly served. We spend less per head on education than the States.

The cause of all of this is short termism – we have developed a shocking inability to think beyond the next few weeks. The very few examples of any policy excellence in the last 15 years have been where politicians or civil servants have risen to a challenge in a moment of crisis.

It is easy to produce a list of sensible ways forward: modernise taxes to raise more revenue with fewer distortions; improve relations with the EU and streamline UK-EU trade; liberalise planning rules to create jobs and cheaper, better homes. Most policy makers and many politicians know this – but nothing ever happens. The LSE’s 2017 Growth Commission report contained many proposals, tellingly most of these were institutional reforms – to keep politicians away from policy proposals.

For the time being we may all be worse off, but of course some of us will be more worse off than others.

Finally, I will leave you with a question hat has been stumping economists for decades, is there a way of accurately predicting market cycles? Perhaps so.

Samuel Benner was a farmer in the 1800’s who wanted to understand how market cycles worked. In 1895 he published a book forecasting business and commodity prices. He identified years of panic, years of good times and years of hard times. In panic years the market abandons rationality, either buying or selling a stock until it’s price skyrockets or plummets beyond expectations. Good times are times of high prices and the best time to sell stocks and assets of many types. In hard times Benner recommends buying stocks and goods and holding them until “boom” times and then unloading them. Superimposing the Benner cycle chart against past market results shows a remarkably strong correlation. Especially with regards to market highs – good times in Benner’s terms. Encouragingly Benner does not predict another Panic Year until 2035.

For the record 2023 is a year to buy stocks. You heard it here first.

Property Market Update

As expected the second consecutive pause of interest rates at 5.25% was announced earlier this week. Unlike the US where a more robust economy has kept the possibility of further rate rises on the table, it is more likely in the UK that the peak of interest rates has or is closed to being reached - albeit 1% higher and 6 months later than was originally expected at the end of last year.

The impact of increased interest rates is still yet to be felt across the entire country, with around 30% of mortgages still due to be refinanced over the next two years. Preparing for these increases in advance by putting what savings you can aside will help ease the pain when the time comes.

However, for many the rise in interest rates have already had a significant impact with both buyers and sellers as well as landlords and tenants all facing their own challenges. Over the last two years, rental prices have continued to rise although the hopes of being able to live off the rental income is out of reach of many landlords and have forced them to sell some or all of their portfolio to reduce debt or discard unprofitable units. This has reduced the number of properties available for tenants to rent and each property now receives on average 25 enquiries. Since 2019, the number of tenants has increased by more than 40%, whereas the number of available homes to rent has fallen by 35% in the same time. Back in 2019, each property received on average 8 enquiries per property.

Tenants qeueing for a rental property in Chadwell Heath and which received 52 offers

Transaction levels are currently so low that mortgage repayments outweighted the value of new mortgage debt taken out and the latest UK Residential Survey by RICS show demand, sales, instructions and prices remaining in negative terrority. In September, New Buyer enquiries were down 39%, listings down 17% and agreed sales down 37%. Although the slowdown in activity is driven by interest rates, it is being fuelled by strong feelings of uncertainty about the short and long term future. Should interest rates continue to hold at current levels, some sense of stability and security should slowly start to return and help stem the tide of retreat. Lenders have been performing a balancing act during this drought of activity to minimise their exposure to credit risk while at the same time securing enough new customers to remain profitable. A difficult task for an industry whose model is built on small margins supported by large volumes. The result has been the old fashioned approach of undercutting your competition, with frequent product changes and adjustments to the small print. An interesting example being Skipton Building Society's new remortgage rate for existing customers - 3.20% for a two year fixed - however it comes with a 5% fee or £10,000 if you have a mortgage of £200,000. Not that competitive when you do the calculations. You'd be better off with a 6.5% rate which doesn't have a fee.


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