We took the Tideway team to the Aldgate Tap yesterday evening where we could imagine Spring was almost here as we stood under the blossom of the trees of Aldgate Square. There was a huge gaggle of Thursday night City drinkers. Thursday night is the new Friday night in the City and a vibrant atmosphere similarly emerged from every watering hole between there and Bank as we made our way home. A welcome relief for all on what was another bloody day in investment markets.
This morning, I awoke with a single thought, £7.40 for a pint of Guinness! We had joked last evening that the £10 pint was surely coming, and after world events of the last three weeks it’s probably coming quicker than we might think. When I arrived in London as student in 1979 a pint of bitter (no one drank Guinness except at the Boat Show in Earls Court) was typically 35 pence. That’s the impact of inflation and the single biggest economic impact of the ‘war of choice’ between the US, Israel and Iran is on inflation expectations, which are on the rise once again.
As the risk of an extended conflict rises (Stephen O’ Sullivan brings us bang up to date with his thoughts on the conflict HERE) investment markets are already pricing in higher future inflation. Whilst comments from Central Bank interest rate setters shifts from future ‘baked in’ interest rate cuts to ‘maybe the next move might have to be up’, bond markets have already moved.
TradingView, 20/03/2026
10 year gilt yields are up almost 0.75% in three weeks and nudging 5%, the highest rate since the big correction in 2022 when they jumped from under 1% to settle at around 4.5%.
Expectations of inflation increases are lower in the US as it is more self-sufficient on oil, but it is still not insulated from world energy price rises and US petrol pump prices are reportedly up around 30% since the start of the war. US consumers are historically very sensitive to petrol cost rises. US 10 year treasury yields have risen about 0.4% in the last three weeks but are still below 2023 highs.
How Have Market Prices Moved?
Most moves are to be expected against this bond yield move, but some have been more unexpected.
Equity Markets have gone ‘risk off’ with all indices around the world down. In the short- term US markets have held up the best, but even on a year-to-date view that position reverses.
The S&P 500 is off about 4.5% since its peak, but is down 3.5% year to date, the FTSE 100 by contrast is off 7.8% from its peak but is up 1% year to date.
In the short-term, equity markets tend to be highly correlated as sentiment shifts from risk on to risk off, over longer terms fundamentals determine outcomes as the markets value current and expected corporate profits. Nick covers this below. Looking at the difference between short term volatility and permanent longer-term losses which we hope to avoid.
Tideway’s equity portfolio has been skewed away from US markets to better value markets and looks more like the FTSE 100 than US benchmarks. Our main equity portfolio is off just over 9% but is still up just under 2% year to date.
We can’t avoid the volatility around an event like this, we can see that in any ‘risk on’ days the portfolio performs well, so we just have to remain invested and be patient.
It is still a war of choice, and if there is any saving grace, it is that the rest of the world has so far showed restraint from joining in. Israel, the US and Iran have the wherewithal to bring it to an end, as commercial and political pressures build on all of them. We don’t want to be out of equity markets when that relief comes.
Bond Markets are also going down in value, yet again there has been no negative correlation to equity markets as there used to be. However, the falls are more modest, our active managers are so far protecting capital and forward return expectations are rising.
Longer duration gilts, which we have limited exposure to, have taken the worst hit. The UK gilt index is off around -3.5% since the war started, the UK corporate bond index around -2.5%. Tideway’s active managers collectively are down less than 2%. As we had expected, this is not as big a relative rate rise as in 2022, and our bond funds are less volatile than equities and are underpinning our multi asset portfolios.
A decent positive return from Tideway fixed income in 2026 is still highly likely, whereas uncertainty around short term equity returns for the next 9 months is much, much higher. Will 2026 be the first year it doesn’t pay to buy the dip in equity markets?
Currency markets have seen a stronger US dollar since the war, but not that much stronger considering the risk aversion around today. The pound is off just 0.5% against the dollar year to date. The pound cratered 30% during the 2008 financial crisis sell off in just a few months. Questions around the US dollar as the reserve currency are heightened by the war.
Protecting Against Inflation
Back to my £10 Guinness. Those 30 something year old City workers don’t have that much to worry about. As we completed our pay reviews for the next 12 months, like most employees in financial services, Tideway staff pay increases will match inflation. When the £10 Guinness comes, just like the £7.40 Guinness they will take it in their stride with good cheer.
The challenge for investors of irreplaceable capital looking to generate future income is to make sure they can still afford a pint in 10, 20 and hopefully 30 years’ time.
Equity markets are traditionally considered the best way to protect against inflation, but as we are seeing this month, we must be prepared for and be comfortable with the volatility, we have to stay the course to reap the returns even though sometimes that can feel painful.
Investors in precious metals and Bitcoin have also been getting reminders that without fundamentals such assets don’t always do what you expect. Bitcoin is off more than 40% from its peak, Gold is down 12% and Silver almost 40%. There are no guarantees these assets won’t fall further in value and no calculation to show that these speculative assets will recoup these losses any time soon. At least with equities we have some visibility on the earnings of companies and the sort of multiples that provide a floor to valuations where they become persuasively attractive, not so with these collectables.For a while cash was earning more than inflation but that’s less clear now. A 3.75% deposit interest rate after tax is not going to get you the £10 Guinness when it arrives.
Fortunately, we have a real viable alternative in our high yield fixed income funds. In a presentation to a new client this week we highlighted the long term returns from Royal London’s Sterling Extra Yield fund, one of our biggest and longest standing bond fund holdings.
This 23 year plot against CPI, CPI plus 4% compound, and the average UK Sterling Strategic Bond funds highlights why we like high yield bonds and why we put in effort to get the best active managers.
Not only is there a very strong chance I will be able to still buy a pint of Guinness in 20 years’ time by investing in this fund, this chart also suggests I might even be able to buy a round! Four pints for the price of one today! And this includes the worst year in bond markets for a generation.
After making more than a 35% return in that last three years this fund has fallen just 1.5% since that start of the war. I’ll say cheers to that!
Tideway owns more assets in bond funds than equity funds, which is quite unusual for wealth managers in the modern era and especially after a massive bull run in US equities. It is times like this when we remind ourselves why we do this.
For clients relying on their irreplaceable capital for long term inflation proofed income our mission is to try and deliver that with the least amount of risk as a we can.
These bond funds have:
- Contractual returns implicit in the interest they will earn on the bonds they own
- Highly diversified portfolios to mitigate the risk of defaults
- Inversely correlated and increasing future returns as capital values fall, and
- Active managers who can demonstrate multi decade outperformance of the index
So, it is no surprise that we are attracted to actively managed high yield bond funds like this.
US equity indices may have become the de facto fashionable main component of many wealth managers portfolios even for clients both approaching and in decumulation, but we continue to see these bond funds as the best core element for portfolios designed for this type of client both to protect capital and protect against the long term impact of inflation.
Volatility versus purchasing power:
The past three weeks have reminded us all that markets are inherently unpredictable. Their complexity and sensitivity to real world events make them impossible to control or consistently forecast. Many 2026 outlooks from leading investment banks, particularly on inflation and policy rates, are already looking outdated as geopolitical tensions in the Middle East continue to evolve.
Published in December by TS Lombard:
This underscores an important point: short term predictions, even from the most sophisticated institutions, offer limited value to long term investors. Inflation paths, interest rates, and market trajectories are influenced by forces that are often unknowable, so focusing too heavily on short term forecasts can be distracting and counterproductive.
In times like these, when short-term outcomes are unclear, we find value in the thinking of investors who think long-term, rather than spending their time worrying about short term events which they have no power to affect. The following excerpt, taken from Warren Buffett’s 2011 letter to Berkshire Hathaway shareholders contains an important message. Bold is Tideway’s:
‘The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability – or the reasoned probability – of that investment causing its owner a loss of purchasing-power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period.’
The distinction between purchasing power (the real risk) and volatility is critical. While we cannot control volatility, we can seek to shift the odds in our favour, through thoughtful diversification and sensible long-term asset allocation, of maintaining and increasing purchasing power over the long-term.
We continue to believe that one of the greatest threats to long term purchasing power is the valuation and concentration levels in equity markets rather than geopolitics: Overpay and you can compromise your ability to keep up with inflation, especially where some segments of the current market (those which have the highest weightings in global benchmarks) are very expensive versus history.
Just as we avoided government bonds ahead of the rate rises in 2022 for offering too little return for their potential level of loss (they are still underwater), we continue to steer clear of the most highly valued areas of equity markets, even where they have recently been among the strongest performers through the crisis.
While starting valuations have never been a reliable predictor of short-term market movements, their relationship with long-term returns is much clearer:
- Elevated valuations have historically implied weaker forward returns. For example, a CAPE (Cyclically Adjusted Price-to-Earnings) ratio above 40, today’s starting point, has typically been associated with negative annualised returns over the subsequent decade.
While the rise of AI could challenge historical precedents, we are cautious about relying on an outcome that has little historical foundation. ‘This time is different.’ With valuations near all-time highs, the balance of probabilities suggests it may be difficult for these areas of the equity market to deliver returns investors are hoping for. At the very least, it should at least provide pause for thought before long-term investors commit too much of their capital on such a bet.
Although our allocation to cheaper areas of the equity market, following a strong period of both absolute and relative performance, is currently exhibiting levels of volatility comparable to the broader market, what matters most, however, is not short-term price movement but the preservation and growth of long-term purchasing power. By focusing on attractively valued companies and maintaining diversification across sectors, we believe we are better positioned to compound real returns over time.
In this context, accepting a higher degree of short-term volatility is a necessary trade-off for improving the odds of achieving returns above inflation and, crucially, reducing the risk of permanent capital loss.
