{"id":4329,"date":"2022-05-17T11:08:02","date_gmt":"2022-05-17T11:08:02","guid":{"rendered":"https:\/\/www.tidewaywealth.co.uk\/?post_type=insights&p=4329"},"modified":"2023-08-24T07:40:16","modified_gmt":"2023-08-24T07:40:16","slug":"risk-free-interest-rates-have-risen","status":"publish","type":"insights","link":"https:\/\/tidewaywealth.co.uk\/insights\/risk-free-interest-rates-have-risen\/","title":{"rendered":"Risk Free Interest Rates Have Risen"},"content":{"rendered":"\n

What’s Going On?<\/h2>

The start of 2022 has seen some big changes in financial markets reacting to the end of the pandemic, war in Eastern Europe and Central Banks in the US and UK starting to tighten their monetary policy.\u00a0<\/p>

Risk Free Interest Rates Have Risen<\/strong> <\/h2>

Conventional UK Gilts are down around 8% so far in 2022<\/a>, with the 20-year yield rising from a low of around 0.95% at the end of 2021 to just over 2% today. This is still very low by any historical measure. <\/p>

Last week, the Bank of England<\/a> raised base rates again to 1% and controversially against the worst household income squeeze in 40 years.  <\/p>

Rising rates will impact borrowing costs on mortgages and corporate debt, but also see a return to modest interest payments on cash deposits. New UK banking entrant Chase (subsidiary of JP Morgan) is offering 1.5% interest on cash deposits up to \u00a3250,000. <\/p>

Rate rises are also starting to push up annuity rates. The chart below shows an almost 25% increase in level annuity rates for a 60-year-old in the last few months.  <\/p>

Our pension pots may have gone down this year, but their ability to generate risk-free income has gone up.\u00a0\u00a0<\/p>

\"Risk
Source Hargreaves Lansdown 13\/05\/2022<\/figcaption><\/figure>

The US Dollar Has Strengthened <\/strong> <\/h2>

The US dollar remains the safe haven currency and the pound is down over 10% against the dollar in 2022. <\/p>

This situation increases the value of our foreign investments that are denominated in dollars and our costs when we travel to dollar-based countries or import their goods.<\/p>

The pound is relatively unchanged against the Euro. This suggests that it is not so much the pound weakness as the dollar strength. <\/p>

This result comes on the back of higher interest rates in the US and a perceived stronger economy with less fallout from the Russia-Ukraine conflict.<\/p>

\"\"
Source: Bloomberg Markets 13\/05\/2022<\/figcaption><\/figure>

Company Valuations (But Not Earnings) Have Decreased<\/strong> <\/h2>

The MSCI World index is down around 17% so far in 2022, in US dollar terms, and about 9% in sterling terms, which has lessened the impact of these losses in portfolios.<\/p>

This drop needs to be seen in the context of some very highly valued US stocks which dominate the US and World indices. <\/p>

Not all share prices have been falling.  By contrast the FTSE100, a good proxy for value companies and benefiting from the decline in the pound, is down only 0.5%.   <\/p>

Read what Dundas Global Investors, managers of Heriot Global have to say on this. <\/p>

\u201cFirstly, out of the 69 companies in the portfolio, 30 reported in Q1 with the average dividend increase being 22.6%. This is very much at odds with the stock market sentiment more generally. Furthermore, 41 companies have increased their margins this year and our anticipated growth rate has increased to 13.2% vs. the market 8.5%*. Far from taking a negative view on the market, Dundas believe stocks have just got cheaper.\u201d<\/em>  <\/p>

\u201cThe Nasdaq is down 27% from its record high \u2013 there\u2019s a big divergence in performance \u2013 Netflix down 72%, Meta down 45%, Amazon down 42% whilst Apple \u201conly down\u201d 14%, Google down 22%, Microsoft down 20%\u202f- we own Apple, Google & Microsoft. We believe this points to a stock pickers environment.\u201d<\/em> <\/p>

*Source: Dundas Global Investors 10\/5\/2022 <\/p>

How Are Tideway Clients Fairing?<\/strong> <\/h2>

Of course, your portfolio returns will depend on how you are invested with us.  <\/p>

Our Multi Asset Balanced Portfolio is down around 8% year to date and pretty much in line with its peers in terms of falls this year, having outperformed in the previous few years.  <\/p>

These price falls have masked a large dispersion of returns between both funds and asset classes. <\/p>

In descending order of year-to-date performance: <\/p>