UK, US & Eurozone Inflation fall, and we dive into 'Goldilocks Investing'

Spotlight: Goldilocks Investing

The UK Financial Conduct Authority Financial Lives Survey 2022 suggests that a considerable proportion of affluent investors are holding larger amounts of cash than they need. These investors could make their money work harder by actively engaging with their finances and considering investment opportunities. For instance, in 2022, nearly 60% of adults with investible assets of £10,000 or more, kept either all or most of these assets in cash.



Source: Key findings from the FCA’s Financial Lives May 2022 survey. Base: All UK adults with £10,000 or more in investible assets (2022: 7,525 investors surveyed)
 

However, the report reveals a difference in attitudes among investors. Some are heavily inclined towards high-risk assets such as individual shares and cryptocurrencies and are attracted by the prospect of substantial returns. Ironically, the same investors in some cases also identified as “cautious” when it comes to investing their money and were concerned about extreme losses despite their risky choices. Conversely, another group maintains excessive cash holdings, unaware of the potential for the value of their savings to be eroded by high inflation and missed opportunities for higher returns in the stock market.
 
These findings suggest that many people in the UK might not be accurately assessing the level of risk in their investments. A lack of understanding, overconfidence in the potential of the market to generate positive returns, market turbulence or human behavioural biases could be a few reasons behind this. The bottom line is, DIY investors seem to be either underestimating or overestimating the risks associated with their investment choices i.e. too hot or too cold, as opposed to getting it just right. The investor search is on for a “goldilocks” style strategy if you will - not too risky such that there is a risk of significant capital loss, yet not overly cautious so to endure lacklustre returns due to inflation.
 

The noise

• US consumer prices increased by only 3.2% year-on-year in October, with prices unchanged from last month and coming in 0.1% lower than economist expectations. The annual rise in inflation was the smallest in two years, and combined with data this month showing job and wage growth is cooling, reinforced expectations that the economy could avoid a dreaded recession. US Treasury prices soared following the data release, with US equity markets also trading higher and the value of the US dollar falling against a basket of currencies. Many economists now believe the Federal Reserve’s fastest monetary policy tightening campaign since the 1980s is over, however Fed Chair Jerome Powell has pushed back against that belief.
   

• The Eurozone is struggling with growth at the moment, with growth data hovering around zero with little out there to fuel a meaningful recovery. The latest data on Eurozone consumer inflation followed the same tact as the US and UK as it decelerated to 2.9% year-on-year in October from 4.3% in September on Friday. This further solidified belief that the European Central Bank is also done with their interest rate hiking cycle, a positive sign for growth prospects.
   

• British firm Octopus energy announced that its renewables investing arm had launched a fund with Japan’s Tokyo Gas to invest £3 billion into offshore wind projects by 2030. The fund will focus on Europe, and look to invest in development, construction, and operational stage offshore wind farms, as well as companies creating new offshore wind capacity. The investment fund will look at both traditional offshore wind turbines that are fixed to the seabed and floating offshore wind turbines which harness strong winds deeper at sea. This fund is the next step in Octopus’ plans to pump £15 billion into the offshore wind sector, having already invested into the sector last year through stakes in Hornsea One and Lincs in the UK.

The numbers

GBP Performance to 16/11/2023

Source: Bloomberg, data as at 16/11/2023

The nuance

UK inflation fell to 4.6% in October, lower than expected as household energy prices dropped from a year ago. A wider softening of price pressures brought on by high interest rates provided relief to the Bank of England and Prime Minister Rishi Sunak. The increase in consumer price inflation (CPI) was the smallest in two years, and the biggest fall in annual CPI from one month to the next in over 30 years. Inflation falling from 6.7% in the year to September to 4.6% in October prompted investors to become even more confident that we’ve seen the last interest rate hike of this cycle. Resultantly, UK markets were up off the back of the latest inflation data.

Though the large drop in energy prices from a year ago is acknowledged as a key driver for lower inflation, this time last year UK homes were receiving a £66 per month energy subsidy. This subsidy is not being paid out this year, so in practical terms the cost of energy has hardly dropped for a consumer. The “last mile” of bringing inflation down to its 2% target will be tough the Bank of England has warned. Their forecasts indicate that inflation will only return to its target in late 2025, though many economists are more optimistic.

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