“The most reliable way to predict the future is to create it.” Abraham Lincoln

We try our best to accomplish the quote of the 16th President of the United States using common sense reflections from various sources and experience.

Greenflation: We’ve been introduced to a lot of new, made-up words over the last few months that try to make sense of the high prices that people around the world are currently facing. First came the pandemic-induced supply-chain blockages that triggered the early shoots of inflation. Then came the war in Ukraine that precipitated an unprecedented energy crisis.

The Outlook highlights a range of downside risks. Inflation could continue to prove more persistent than projected, with further disruptions to energy and food markets still possible. A further slowdown in China drag down business confidence. Public debt remains elevated in many countries, in the aftermath of significant fiscal support rolled out in response to the COVID-19 pandemic and the energy price crisis.

Annual GDP growth in the United States is projected at 2.2% in 2023 and 1.3% in 2024, with the slowdown driven by cooler labour markets and more generally the effects of tighter monetary policy. In the euro area, where demand is already subdued, GDP growth is projected to ease to 0.6% in 2023, and edge up to 1.1% in 2024 as the adverse impact of high inflation on real incomes fades.

China’s recovery is weaker than expected following the post-pandemic re-opening, with growth projected at 5.1% this year and 4.6% in 2024.

Some claim bottled water’s markup reaches 4,000 percent – more expensive than gasoline. Saving is simple: drink tap water. If you’re concerned about taste or quality, use a water filtration system. Interesting is the pricing of water globally, and that is still trades below oil, in rough comparison.

Various companies took advantage with some artificially inflating the prices of their products:

The most pronounced impact has been on food prices around the world. Across the wealthy G7 nations, food prices remain the most persistent element of inflation, even as energy prices have plummeted from their recent highs. Italy, which experienced its worst drought in 70 years last year, saw its rice production fall by a third, leading to an almost doubling in rice prices over the last 12 months.

How should investors approach Fixed Income investing today?

Money sitting in cash loses purchasing power every day that inflation rates stay above zero. Investors can offset the impact of inflation on their purchasing power, and in some cases grow their purchasing power.

Long-term bonds require an investor to accept more interest rate risk. If bond yields rise, the value of existing bonds decline.

The Federal Reserve Bank (FED) uses interest rate hikes on the short-term federal funds rate it controls as a tool to raise borrowing costs to slow economic activity with the hope of reducing inflation. While inflation trended lower after its mid-2022 peak, it remains above the Fed’s target inflation rate of 2% annually. The Fed has opened the door to the potential of another rate hike in 2023, and indicated that it does not plan to begin reducing rates until well into 2024.

Investors are in an unusual position of having the ability to earn higher yields on shorter-term debt instruments rather than locking money up for longer periods to generate higher interest income. This is what’s known as an “inverted yield curve.” It’s not unprecedented, but its occurrence is rare. Along with upending the normal state of the bond market, a yield curve inversion is considered by some as a warning signal for the U.S. economy, potentially the precursor to a recession.

A yield curve inversion occurred already in 2019 before a normal yield curve reasserted itself. Then later in 2022, it inverted again, and has remained inverted since. Yet the economy has maintained a slow but steady growth rate. Is there still a risk that the yield curve will correctly signal a looming recession, and how should investors respond?

And the financial markets?

Global financial markets are in a defiant environment, characterized by a global rise in interest rates, continued restrictive monetary policy and uncertainties regarding the prospects of the overall economy. The price declines in both equity and fixed income investments increased towards the end of the quarter and led to overall negative year-to-date returns in interest-sensitive investments such as bonds, international real estate, and gold.

The risk aversion increased markedly due to the latest statements from the monetary authorities that interest rates will remain higher for longer. Furthermore, leading economic indicators continue to point to an economic slowdown and, the risks of a real estate crisis in China increased markedly, making the achievement of the specified growth targets of the economy more ambitious.

In contrast to the central banks‘ statements with respect to short-term developments, long-term inflation expectations appear to be well anchored in the target range. Accordingly, market participants are not expecting any further interest rate increases this year. However, according to the latest statements by the authorities, expectations of a first interest rate reduction have been deferred to the third quarter of 2024 matching the declaration of central bankers: “higher for longer”.

Alternatives in the current environment?

We, as always, follow a disciplined, structered approach in investment management. Diversification is probably the only free-lunch that is offered in financial markets. A well balanced approach in investing is therefore of utmost importance.

Besides equity and fixed income allocations, alternative sources of income are in high demand especially in the current environement.

After a period of extensive research and a track record of two years we launched a fund solution based on the volatility premia beginning of this year. The strategy offers investors a risk-optimized access to an alternative source of income, which is intended to supplement the traditional asset classes by collecting a premia on the options market.

The simulated performance is based on a systematic strategy, minus fees and expected transaction costs. This is for general information only and should not be used as a basis for specific investment decisions. Every prediction or forecast is fraught with uncertainty and cannot necessarily be extrapolated into the future. Data from December 2007 to December 2022.

The strategy performed in-line with our expectations in the current environment, moreover, benefitting of the high interest rates as the portfolio consists of short-term bonds which currently yield more than 5% p.a.

On our portfolio assessment platform all data is regularly updated so that various strategies can be modeled and compared.

We remain at your disposal for further information.

Kind regards

Your JACOT Partners Financial Services Ltd

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