Market Commentary 14th October 2022

For those who don’t know me, I head the investment team at IPS Capital. Each week I highlight few things that have come across my desk that I think are interesting and investment related. We always welcome dialogue so if you have any questions we’ll be happy to answer them here too.


Let’s start this week with a client question: why is US market performing much worse than UK (especially given UK mini-budget debacle)?

I’d guess this question is prompted by tables such like the one we showed in our latest quarterly overview piece (sent out this week – please let us know if you’d like a copy directly):

The reason we showed the data this way is that we run portfolios for GBP, USD and EUR based investors. The tables above ignore currency effects ­– so we show above the return on US equities for a US investor for example. A US dollar investor would indeed be down 23.9% if they owned the US S&P 500 equity index (and did not receive any comfort from the fact the dollar got stronger).

If, however, you are a UK investor the US dollar was much stronger at on 30th September than it was at the start of the year (1.12 vs 1.35). Here are the same equity returns but for sterling investors (so the return if you are GBP investor in different markets and do not do any currency hedging):

This should make more sense. Sterling has weakened as investors have pulled money from it because of its weaker growth outlook. Adjusting for this, the returns from the UK and US markets are pretty similar. However, the FTSE 100 has a large allocation to global companies whose sales naturally rise as sterling weakens. The FTSE 250 Index is more representative of UK plc. This is down -25% for the year (and is -18% behind US markets). These are bear market style losses reflecting both the impact of higher interest rates and higher energy prices (because of Russia’s actions) on the UK economy.

A more recent problem has, of course, been the recent Truss/Kwarteng mini-budget. There is a famous 1990’s quote from James Carville, Bill Clinton’s political adviser:

I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a . 400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.

The bond market has been pretty dormant since that era but it showed it’s teeth again after the budget announcement. It’s OK in principal to announce £160bn of extra borrowing but ultimately you need to have someone lend you the money. The market simply wasn’t convinced these people existed. The Bank of England was forced to intervene and stabilise government bond markets the following week.

Here I would say we are starting to see signs that the worst is over. Truss and Kwarteng are being forced to tone down their budget (if indeed they survive all this). The Bank of England interventions also look to be working. As an example of the craziness we have seen, here is the price of the 30 year government bond over the last month. It fell 30% immediately after the mini-budget, recovered a good chunk of this, fell again and is now starting to recover again. For a few weeks the UK has done a passable impression of Argentina. It is time for this impression to be over.

The price for the UK benchmark government bond over the last month

That said, how much of this is down to the Truss/Kwarteng mini-budget itself and how much is down to the fact the UK has high (and rising) government debt?

Let’s finish with some better news. One reason not to panic too much longer term is that the UK looks in pretty good shape financially when compared to other large, developed market countries. The table below (via Goldman Sachs) shows that UK debt to GDP ratios are below those found in France, the US or Italy for example. Also, crucially, the UK generally borrows by issuing long dated bonds (with an average maturity of over 14 years). This means there is only a small amount (around 7%) that needs to be refinanced each year at today’s higher rates. Unlike the UK mortgage markets (where around 45% of the market is on 2 year fixed or shorter rate deals) higher interest rates will only slowly feed into higher funding costs. As a UK tax-payer myself, this gives me some comfort.

What does all this mean for our portfolios? Any toning down of the budget should mean less short term borrowing by the government. This should help government bond markets continue to stabilise. The average 2 year fixed rate for UK mortgages is now over 6%. Ultimately we think it cannot stay this high for too long. We therefore continue to like the 5% plus yields available on shorter dated, high quality bonds. Higher interest rates are only starting to feed through to the UK economy. We are happy to wait for the impact of this to come through before we start getting bullish UK assets again. The one good thing about today is that by investing in 5% plus yielding debt you can at least get paid to wait.

Chris Brown
IPS Capital


The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.