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In Insights, News, Uncategorised

2023 – Looking backwards and forwards

At the start of 2022 investors needed reminding that investing is not an easy game, despite having enjoyed around a decade of relatively strong – and fairly consistent – market returns, even in light of a global pandemic, recession, and political polarisation. 2022 has laid bare the fact that investing can very much be a game of ‘three steps forward, one step back’. If there was no risk of market downside, it would be unreasonable to expect any return at all above cash. This short note provides a brief look at the past 12 months, and highlights some of the lessons we can learn as investors.

Looking backwards

For many investors 2022 was a relatively tough year, with returns ranging from benign to poor across most major asset classes – global developed value companies being an exception. Rising prices make returns significantly worse on an after-inflation basis, with year-on-year inflation in the UK having reached levels not seen for decades. The year was particularly challenging for investors in bonds, as yields have risen (and thus prices have fallen) across much of the world. Bondholders with longer and lower quality debt suffered greater capital falls – shorter dated, high-quality bonds continue to be preferred.

Figure 1: Global investment returns – sensible assets 2022 returns

Data: Funds used to represent asset classes, in GBP. See endnote for details.

With few places to hide most investors will have finished the year in negative territory, which is to be expected from time to time. The magnitude of the losses, however, should lie well within the tolerances of their financial plan. Investors with a reasonable amount of equity exposure should be able to withstand more material falls than those experienced in 2022 (global equities fell by over 40% during the Credit Crisis, for example). That said, those overweighting value companies and focusing on shorter-dated bonds will find themselves in better space than most, though this is little consolation when returns are still negative in an absolute sense. Investing is never a straight-line journey.

Sensible, systematic portfolios comprising a diversified basket of equities – with tilts to value and smaller companies – paired with short dated high-quality bonds – from low risk to high risk – will have provided better results than most other solutions in 2022. Such solutions outperformed over 70%[1] of professionally managed multi-asset funds over the 12 months due to these portfolio decisions.

Investors with portfolios denominated in GBP have benefited from the strong performance of the US dollar, which has meant overseas assets translate back to more in GBP terms. In USD terms (which is often reported in the press) global equities fell around 18% in 2022, around 10% more than when viewed in GBP terms. Some of the major US firms like Tesla and Meta which have hit headlines with share price falls of over 70% and 60% respectively in the past year, however, they only represent a small allocation – and thus have a small impact – in a well-diversified portfolio.

The asset class that – uncharacteristically – stole the headlines (for all the wrong reasons) was fixed income. Many bond indices experienced their worst calendar year on record. This was chiefly due to a swift increase in the compensation bondholders demand for lending their capital, on the back of – more persistent than foreseen – high inflation and corresponding rising policy rates from central banks. Rising borrowing costs, and little yield buffer to begin with, have meant absolute falls for fixed income investors, something that few investors will have seen, in a year when equities fell too. The last time was 1994.

The reality is, however, that higher yields are a good thing for investors with time horizons longer than the maturity of their bonds. Over time, the new bonds being invested in have been at a higher yield, providing a larger yield cushion going forward and reducing the chance of absolute falls on an interim basis. Bondholders start 2023 in far better shape – from an expected return perspective – than 12 months prior. Today, 5-year gilt yields stand at 3.5%, as opposed to -0.1% at the start of 2022.

Looking forwards

Uncertainty abounds – it always does. Basing investment decisions on forecasts or judgments is generally best avoided. Forming market outlooks can be used to create accountability, or perhaps at best just for a bit of fun. After stating his column’s 2023 predictions Robert Armstrong, of the Financial Times, questions: ‘Do I have high confidence in any of this? Heck no.’. There is no shortage of seemingly sensible predictions on market performance and global developments[2], nor any effective method to separate those that will be more or less accurate.

Investors should therefore look to the future with the anticipation that new information will come to light, and markets will react quickly to take it into account. Without the ability to profit directly from superior information one, therefore, should construct a diversified portfolio built to weather all storms, guided by an ever-growing body of academic literature. If, for example, inflation or growth come in higher or lower than expected, some parts of the portfolio will – by design – be helping, and others detracting from, performance.  That is what diversification is!

With the reasonable belief that risk and reward go hand in hand, each day it should be expected that incremental risk taking in a portfolio will be rewarded, such as owning equities or bonds over cash. However, on a daily (or even multi-year) basis – which in the context of a true investment time horizon is miniscule – the expected daily reward is dominated by unexpected noise, which can be positive or negative.

And finally…

This note has focused on investing. Outside of investors’ portfolios, Putin continues wage his illegal war in Ukraine and much of the world is feeling the repercussions of the supply chain impacts. The NHS is under considerable strain. Increasing borrowing costs and a higher cost of living place pressure on many of us. These challenges provide a stark reminder that we should be grateful for what we can be. News outlets have a bias towards reporting bad news, which is hardly surprising. Bad news sells.

Nicholas Kristof of the New York Times plainly states that journalists ‘report on planes that crash, not planes that land’ and writes[3] a column on some significant achievements made by the human race in 2022. For example, solar power is now on track to overtake coal as the world’s leading power source in the next five years. Time away from day-to-day news can help one feel more positive or reading information from news outlets such as Good News Network®[4] can be a refreshing exercise. Enjoy a fulfilled 2023 and all the better news it may bring.

From an investing perspective, we are hopeful for the best in 2023 and beyond but remain prepared for the worst.

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Data series used

Asset class Fund ISIN Weight in P60
Gbl market Fidelity Index World P Acc GB00BJS8SJ34 27.5%
Gbl value Dimensional Global Value GBP Acc IE00B3NVPH21 9.2%
Gbl small cap Vanguard Glb Small-Cp Idx £ Acc IE00B3X1NT05 9.2%
EM iShares Emerging Mkts Eq Idx (UK) D Acc GB00B84DY642 4.9%
EM value Dimensional Emerging Mkts Val GBP Acc IE00B0HCGX34 1.6%
EM small cap iShares MSCI EM Small Cap ETF USD Dist IE00B3F81G20 1.6%
Gbl property L&G Global Real Estate Div Index I Acc GB00BYW7CN38 6.0%
Short, high qual bonds Dimensional Global Short Dated Bd Acc GB0033772848 36.0%
UK 1-5 gilts iShares UK Gilts 0-5yr ETF GBP Dist IE00B4WXJK79 0.0%
UK IL gilts Dimensional £InflLnkdIntermDurFI GBP Acc IE00B3PVQJ91 4.0%

Weights for each portfolio are pro-rated up/down according to portfolio equity allocation. Fixed income funds in blue, equity funds in green. More information is available on request.

[1] Source: Albion Strategic Consulting. Systematic portfolios breakdown found in endnotes.

[2] Armstrong provides a list of outlooks from several significant market participants: https://www.ft.com/content/7803704f-8161-4af8-b9b5-1a7ccd5c2cba

[3] https://www.nytimes.com/2022/12/31/opinion/2022-good-news.html

[4] https://www.goodnewsnetwork.org/

In Insights, News, Uncategorised

Value Worth Waiting For

Sensible investing is about taking on sensible risks in your portfolio, which starts with owning equities over cash.  Historical data and logic tell us to expect a premium for doing so. In the long run this has been in the region of 3% to 4% per annum.  It may not sound much, but when compounded over time it has an amazing beneficial impact on the level of wealth accumulated, and therefore life choices that can be made.  Let’s generously assume that cash delivers 1% p.a. above inflation and equities deliver 5% p.a. above inflation.  A sixty-year-old, perhaps approaching retirement, should be planning to live 100 these days. Investing in cash they would turn £1,000 of purchasing power into £1,500, whereas if they had invested in equities, £1,000 would be worth a little over £7,000.  That provides materially greater choices and fewer worries about money.

The challenge that all investors face is that to capture these returns, owners of equities (part shares in real companies) is that they are likely to experience some tough times in the markets. The average 20-year global equity exposure (since 1955) turned £100 of purchasing power into around £250[1]. Although one unfortunate cohort of equity investors saw £100 turned into £85 over 20 years.  In fact, on any one day you have something like a 1-in-2 chance that the equity risk premium will be negative, but over 5 years this falls to 1-in-8, and to around 1-in-10 at 10 years.  The longer the period of time invested for, the greater the likelihood – but never the guarantee – that returns will be positive.

Investors could capture the returns of global equities using a cheap single index-tacking fund that captures the returns from global markets.  It is certainly not a bad place to start, a view supported by Eugene Fama, renowned for his work on efficient markets for which he earned himself a Nobel Prize in Economics:

‘You’ve got to talk your way out of a market cap weighted portfolio’

There are some conversations – led by Fama himself – that suggest that owning overweights – or tilts – to specific parts of the market that have higher risks and thus higher expected returns may be one occasion to step away from markets, for those who have a preference to do so.  These incremental returns, as we have seen above, are valuable to investors.

One such ‘risk factor’ is the ‘value’ premium, which is incorporated into portfolios.  Accepting that markets work pretty well, incorporating information into prices efficiently (again another useful assumption to make), their prices must hold some useful information.  Comparing equities to each other, scaled by either a balance sheet or profit and loss item, such as book value or earnings, allows us to rank them into ‘cheaper’ or ‘value’ stocks (e.g. low price relative to book value) and ‘expensive’ or ‘growth’ stocks (being the opposite).  Given that the price is right (markets work) value stocks are not cheap in the ‘it’s a bargain’ way, but cheap because something else is going on.  That something else is higher risk.  However, the flip side of higher risk is higher return, which is evidenced in the historical data.  It works across different time periods, markets and even asset classes. Different measures (e.g. price-to-cashflow, price-to-earnings, price-to-dividends) all work as robust measures of value.  It has also been shown that the value premium can be extracted successfully in real, live funds.

Like the equity premium, extended periods of time can occur when the value premium is negative.  Over the ten or so years to the end of 2020, owning value stocks was a tough place to be in a relative sense as growth stocks that became more and more ‘expensive’, despite delivering strong absolute returns.  Some investors may have abandoned their value stocks, as they could not take the relative pain.  As they sell them and go underweight value stocks, someone else has to be persuaded to buy them and hold the overweight position, improving the latter’s expected returns (remember it’s a zero-sum world out there).  You get paid for holding stocks that kick you when you are down!  However, if you hold a robust premium that meets stringent hurdles – as value does – the key is to hold not fold.

Take a look at what has been going on lately. Value stocks have been clawing back some of their relative underperformance to the broad market, delivering strong returns in markets where growth (‘expensive’) stocks have fallen hard in 2021-2, dragging down the broad market, not least in the US.  This strong positive premium has been as seen in emerging markets too.

Figure 1: Global value has been delivering a positive premium of late

Data: Dimensional Global Value Fund Acc. in GBP and Vanguard FTSE Developed World UCITS ETF (VEVE)[2].

Steeping away from the market takes courage and discipline but is likely to be worth the wait.  One swallow does not make a summer, but positive outcomes are always welcome.

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

[1] Albion Strategic Consulting (2021) – internal analysis.

[2] Note that these two funds have been used purely for educational purposes and reference to them should not be construed as any form of recommendation.

In Insights, News, Uncategorised

Pacem Shortlisted for 3 Eastside Awards!

Pacem is delighted to announce that we have have been shortlisted in three categories for the 2022 Eastside Awards.

The Eastside Awards exist to showcase the best in East Belfast and Pacem is a proud recipient of the ‘Eastside Award for Employer of the Year’ in 2020 and a double award recipient of both the ‘Eastside Award for Employer of the Year’ and ‘The Eastside Award for Business Growth in 2021’.

Speaking on what it means to win and Eastside Award and to be shortlisted again in 2022, Daniel Glover, MD at Pacem said: “We first heard about the Eastside Awards through East Belfast Enterprise as we were providing some accountancy advice to some of the early-stage businesses in the building. As someone who both resides, and works in the East Belfast area, I instantly thought it was a fantastic initiative to showcase some of the many vibrant businesses and people in the area. Over the years we have experienced a period of rapid growth, going from a team of 3 to 19, and we thought it would be great to enter the awards to showcase how far the business has come and grown in a short space of time. We brought the team to the gala dinner at the Stormont hotel where we were delighted to find out we had won ‘Employer of the year’ in 2020 and then again in 2021 along with the award for ‘Business Growth’, we had a fantastic night out with the team on both occasions celebrating all of their hard work and efforts over the years. He continued: “We have worked exceptionally hard on growing the business and developing a fantastic team and it is great to have that hard work and effort publicly showcased. The strength of our team combined with coordinated wealth planning and accounting services, are what sets Pacem apart from our competition and drives our continued success and we are looking forward to bringing the team along the the Gala dinner on 27th January to celebrate not just our success, but the successes of all the other worthy finalists who are making East Belfast a better place to live, work and play”.

The full list of the 2022 Eastside Awards in association with George Best Belfast City Airport finalists are:

Eastside Award for Apprentice of the Year sponsored by Wolseley Plumb & Parts:

Benjamin Bennett, Horatio Todds; James Mallin, Totalis; Jordan Sloan, Titanic Hotel Belfast

Eastside Award for Best Organisation to Work For sponsored by Fleet Financial:

Ashfield Girls’ High School; Connswater Homes; Pacem

Eastside Award for Business Start Up sponsored by Belfast City Council:

Bullhouse East; Joob Joobs; Murphy & Bailey

Eastside Award for Business Growth sponsored by We’resure Insurance Services:

Art Loves; La Bella Vita; Pacem

Eastside Award for Community Impact sponsored by Belfast Harbour:

EastSide Greenways; East Belfast Street Team; In This Together

Eastside Award for Contribution to the Arts sponsored by Millar McCall Wylie:

Ajendance NI; The Bright Umbrella Drama Company; The Gertrude Star Flute Band, Fifes & Fusion

Eastside Award for Environmental Sustainability sponsored by Kainos:

Davines; Pacem; The Wardrobe

Eastside Award for Excellence in Health and Wellbeing sponsored by Better Gyms:

Ashfield Girls’ High School; Helping Hands Autism Support Group; Jump Jiggle and Jive

Eastside Award for Favourite Classroom Assistant in East Belfast sponsored by Belfast Live:

Gary Chambers, Lough View Integrated Primary School; Kirstie Shaw, Ashfield Girls’ High School; Stephanie Wilson, Ashfield Boys’ High School

Eastside Award for Favourite Eatery (Café/Restaurant) in East Belfast sponsored by Solv Group:

Bodega Bagels; Gardener’s Rest at Hillmount; Lazy Claire Patisserie

Eastside Award for Favourite Teacher in East Belfast sponsored by The Open University:

Suzanne Greenwood, Orangefield Primary School; Mr Pollock, Elmgrove Primary School; Brendan Shannon, Lisnasharragh Primary School

Eastside Award for Sports Initiative of the Year sponsored by Phoenix Natural Gas:

CIYMS, Men’s Hockey Club; Titanic Tigers Special Olympics Club; Tullycarnet Boxing Club

Eastside Award for Tourism Experience sponsored by EastSide Partnership:

Glentoran in the Community; Scott’s Jazz Club; Titanic Hotel Belfast

Eastside Award for Young Person of the Year sponsored by George Best Belfast City Airport:

Ryan Jamison, Refresh Property Solutions Ltd; Lisa Jiang, Ashfield Girls’ High School; Rachael McDowell, Ashfield Girls’ High School

Eastside Award for Volunteer of the Year sponsored by East Belfast Mission:

Susan Gillen, Titanic Tigers Special Olympics Young Athletes Club; Rachael McDowell, Ashfield Girls’ High School; Chloe O’Neill, Youth Initiatives

Hosted by television presenter Tara Mills, winners will be announced at the glittering celebration in Hastings Stormont Hotel on Friday 27 January 2023.

In Insights, News, Uncategorised

30 Climate Leaders Under 30 Created for Northern Ireland

A cohort of 30 people under the age of 30 has been convened to lead the local response of the younger generation to the climate emergency. In the first of its kind for Northern Ireland and the UK, the class of 2022/23 30 Under 30 Climate Change-Makers was competitively assembled by environmental charity Keep Northern Ireland Beautiful, and supported by Pacem, Pinsent Masons & Danske Bank, in an application process that attracted over 100 submissions from young people from across the country. The group made their introductions on Friday 11 November in a ‘Finance, Economy and Business’ workshop led by business and media commentator Justin Urquhart Stewart and the Belfast-based emissions-data company Catagen. The programme pulls together individuals from an array of backgrounds, including representatives from some of Northern Ireland’s leading public, private and third-sector organisations.

Úna Barrett, a 30 Under 30 participant said, “The changing climate continues to shape our lives immeasurably. The Climate Change-Makers programme has created an invaluable network of like-minded individuals and provided us with a crucial platform for cross-sector collaboration and idea sharing. Being involved in this prestigious programme and meeting my fellow participants has reignited my hope for the future of the planet.”

Jenna Potter, the programme manager at Keep Northern Ireland Beautiful added, “30 Under 30 Climate Change-Makers is a fantastic platform, bringing together our brightest and most climate-engaged individuals who have a passion to make a change. The programme aims to give young people an opportunity for collaboration, connection and the knowledge needed to shape the environmental future of Northern Ireland.”

Founder of Pacem, Daniel Glover explained, “Environmental Sustainability is something that has been at the heart of our business ethos for quite some time and is an area of continuous development. We are delighted to support the 30 Under 30 Climate change makers programme in order to promote positive environment and sustainability outcomes in the wider community. We are looking forward to watch the cohort grow and become the next generation of leaders here in Northern Ireland and further afield”.

Intended as an annual opportunity for anyone who is aged 30 and under and residing in Northern Ireland, 30 Under 30 Northern Ireland Climate Change-Makers was inspired by the Environmental Educators 30 Under 30 initiative that was introduced by the North American Association for Environmental Education in 2016. The programme is delivered by Keep Northern Ireland Beautiful and Podiem, and funded by the Department of Agriculture, Environment and Rural Affairs (DAERA), Pacem, Pinsent Masons and Danske Bank. For more information on the programme and its participant, visit www.keepnorthernirelandbeautiful.org/30under30-ccm

In Insights, News, Uncategorised

In Defence of Democracies, Markets & the Media

Three prime ministers and three chancellors in as many months, certainly feels chaotic, possibly a bit embarrassing, as well as a little depressing.  There is no doubt that the UK could do with some stability, fiscal rectitude and general leadership. Let’s hope that Rishi Sunak can deliver some. Let us think about the magnitude of what has just happened.  The Conservative party decided, whether rightly or wrongly depending on one’s opinion, that Boris Johnson had to go, fearful of its increasingly appalling polling numbers with the electorate.  A prolonged and uninspiring leadership contest over the long hot summer, ushered in Liz Truss for a fleeting moment before the markets, and again the fear of even worse polling figures, forced her to fall on her sword.  That is all well documented but misses a key point.

What we should be reflecting on is not this mess but the fact that we live in a free, democratic nation, where the government is, as described by Abraham Lincoln in his Gettysburg Address of 1863, ‘of the people, by the people, for the people’.  Living in a society where the ability of the Conservative party to serially partake in the regicide of its leader, in fear of the will of the people, and for voters and opposition parties to freely voice their own opinions, without fear or violence, is a privilege, whatever your political hue.

Contrast that with scenes from the recent Chinese Communist Party Congress of President Xi, a dictator reneging on the established term limits, having an ex-leader humiliated and dragged from proceedings and filling the Politburo with ‘yes’ men, sits in stark contrast.  Political opponents are not just miffed, as they are in the UK, they live in fear of their lives.  Arguing over a pint as to whether there should be a general election, or whether the Conservatives still have a valid mandate, given that it won a majority of 80 at the last election and the UK has a system of parliamentary democracy, is a luxury for those living in a free, stable and open society.

The will of the market, like the people, is a strong democratic force.  Its role is to set prices by incorporating all known information, without fear or favour, to reach an equilibrium price, allowing investors to allocate their capital efficiently.  Liz Truss certainly understood pretty quickly the power of the bond market, as it evaluated her vision for growth against the risks of unfunded tax cuts. The market did not like what it saw and the yield it expected to be paid to lend to the UK government rose, impacting mortgage and other borrowing rates, which in turn was reflected in peoples’ views on her policies.

In an open society the value of a free press is also immeasurable, providing access to information quickly and generally accurately – or at least at risk of fact checking or criticism by other media outlets and commentators – which feeds into both market prices and national opinion.  It looks into dark corners and drives accountability.  For sure, news is a self-selected sub-set of what is going on in the world and more likely to reflect disasters, acts of violence, and thus at risk of portraying a more negative outlook than perhaps truly exists.  We can see in Russia and China what the harmful consequences are of a state-controlled media.  You may not like the Daily Telegraph or the Guardian, depending on which side of the political fence you sit, but to have the choice is, again, something to be valued.

For sure we are in for some tough times economically but remember that at least we live in a society where we are free to express our views, where markets work and the media – however annoying it can sometimes be – helps to hold our politicians’ feet to the fire.   Stay positive!

 

If you have any questions, thoughts or actions relating to the content of this article please get in touch with us by calling us on 028 9099 6948 or by emailing info@pacem-advisory.com

In Uncategorised

Pacem Supports Prestigious International ‘30 Under 30’ Personal Development Programme for NI Climate Change Makers

Are you under 30 and passionate about the environment? Calling the class of 22/23!

– young eco leaders sought for prestigious international ‘30 Under 30’ personal development programme –

A world-class leadership programme designed to unearth, inspire, and equip 30 ‘exceptional potential leaders’ under the age of 30 has been launched in Northern Ireland for the first time by environmental charity Keep Northern Ireland Beautiful, and will be delivered in partnership with the North American Association for Environmental Education and Podiem. Financial support for the programme has been provided by the Department of Agriculture, Environment and Rural Affairs (DAERA), Pacem, Pinsent Masons and Danske Bank.

‘30 Under 30’ (30U30) will offer successful applicants the opportunity to attend a series of six prestigious, half-day workshops delivered by internationally renowned thinkers and leaders. The focus will be on inspiring and enabling participants to develop their skills, confidence and leadership potential in the company of a supportive and environmentally focused peer group. At the end of the programme, the top five class members will receive a bursary to pursue their own transformational project and one class member will receive a scholarship to attend the North American AEE Conference later in 2023.

Edwin Poots MLA, Minister for Agriculture, Environment and Rural Affairs said of the new programme:

“Talented young people from Northern Ireland have, for many years, benefitted from international development opportunities such as the Washington Ireland Programme and others, and have gone on to inspiring leadership roles in many different spheres. The 30 Under 30 programme is very much the environmental equivalent of these prestigious initiatives and will give young people with a passion for the environment the chance to learn, to connect with others and ultimately to shine. And they will be able to avail of this opportunity and international connections from right here in Belfast. My department is very proud to support Northern Ireland’s inaugural 30U30 class and looks forward to proudly observing the future success of these young environmental champions.”

Keep Northern Ireland Beautiful’s Chief Executive, Dr Ian Humphreys said:

“I have for several years found inspiration in the North American Association for Environmental Education’s 30 Under 30 programme and have dreamt of bringing it to Northern Ireland, where I know we have such a wealth of young talent. I’ve watched young leaders like Emer Rafferty and Rosalind Skillen come through our Eco-Schools and Young Reporters for the Environment programme, then the international 30 Under 30 programme, to a point where they are now regularly speaking up for Northern Ireland’s young people on the world stage at international events like COP. I look forward to seeing more young environmental leaders forging ahead in other spheres of our society, in business, in agriculture, in science and in politics; and I very much see this new Northern Ireland chapter of 30U30 as a way of enabling that to happen.”

Kevin Kelly, Founder and Director of Podiem said:

“Over the next 6 months the 30U30 participants will hear from some of the most inspirational thought-leaders in Europe and will return to their sectors and fields of interest with the leadership tools to drive positive climate action. We are delighted to be working with a premium group of partners on a programme which marks the next phase in our Sustain Exchange ecosystem which consists of a proactive community of planet-conscious leaders and organisations”.

To apply to the 30U30 programme, young people between the ages of 16 and 30 are invited to complete a 20 minute form and short video application at www.sustain-exchange.com/30-under-30. The closing date is Sunday 23rd October at 11.59pm. Successful applicants will be required to be available for programme workshops on six dates (Thursdays and Fridays in Belfast) between 27 October to 24 March 2023.

In addition, the first 40 applicants to the programme will secure a complimentary place at the Sustain Exchange Summit at Titanic Belfast on 27 October, featuring an influential line up of speakers.

In Uncategorised

An upside-down view of currencies and interest rates

Whatever your politics, one has to feel a bit of sympathy (maybe) for the new Chancellor. It has been a very tough first week in a new job; lambasted by the media, accused by the Labour leader of ‘crashing’ the pound and causing higher inflation and interest rates; and a bad report from the IMF. It is certainly true that Sterling has been falling, and inflation and interest rates rising; yet to suggest that this is solely down to recent Government incompetence is to take a very narrow view. Putting hyperbole, politics and the minute-by-minute gyrations of the market aside for a moment, let’s take a step back and look at what has been going on.

Sterling’s woes or Dollar strength?
Sterling has been falling against the US dollar for some time, but turning this upside down, the dollar has been strengthening against Sterling. In fact, due to its status as a ‘safe-haven’ currency, and the Fed’s more aggressive rate raising strategy, which has resulted in more attractive shorter-term yields, the US dollar has strengthened against most major currencies over the past year, attracting global capital. It is also a major energy exporter, which adds extra support. The DXY index that tracks the dollar against six major currencies stands today at a 20-year high. As the chart below illustrates, Sterling is largely unchanged against the Euro and the Japanese Yen over the past year.

Figure 1: Dollar strength is the key driver of currency ‘weakness’ – 1 year to 27-Sep-2022


Data: Google.

A consequence of the weak Pound is importing inflation, as around one third of household consumption is made up of imports, which are now more costly.
Narratives that suggest that Sterling is turning into an emerging market currency and that this could lead to a currency crisis are headline grabbing but flawed. The UK has a flexible exchange rate (it is not pegged to any other currency); its financial markets are highly established and liquid; the Bank of England operates independently of the Government; and unlike emerging economies, almost the entirety of its debt is denominated in Sterling .

From an investor’s perspective, a rising US dollar provides a positive contribution to Sterling-based returns, as US assets are worth more – over 20% more – in the past year. This has helped to shore up portfolio returns for many. The UK equity market is down only around 3% in the past year , supported by large holdings to sectors such as energy and low holdings to technology, combined with the fact that a majority of earnings are from overseas, benefitting to some degree from these exchange rate movements. No-one really knows where Sterling will go from here and over what timeframe. Hedging fixed income assets remains sensible as this reduces their volatility and remaining unhedged (i.e. exposed to currency movements) in equity assets continues to make good sense and will support portfolio values if Sterling falls further.

Inflation and interest rate rises
Again, reading the news one might get the impression that rising inflation and interest rates in the UK is a pain inflicted on the population entirely by its Government. Yet to turn this inward looking view outward, rising interest rates are a global phenomenon as the countries grapple with high inflation caused by a rapid growth in the money supply (quantitative easing), supply side issues caused by Covid, and the price pressures on energy and food created by Russia’s war in Ukraine. The fact that the UK Government needs to borrow more, as a consequence of the energy cost support packages and its unfunded tax cuts, is also contributing to rising yields. But take a look at inflation, central bank interest rates, and bond yields in a number of major economies in the chart below.

Figure 2: Inflation and interest rates on 27th September 2022

Data source: Countries’ central banks (note inflation for Germany and Italy is the Eurozone inflation rate).

It is evident that inflation is universally high. Five-year bond yields are at or near 4% in all but one of these economies, and all have risen materially in the past six months. Whilst that is bad news for mortgage and other borrowers, who have benefited from an extremely low cost of borrowing for many years, it is better news for those holding cash or investing in bonds. Despite bond price falls as a consequence of yield rises, long-term investors will be better off, over time , from yields at 4% than at near 0%, which we saw 18 months ago. In the UK real (after inflation) yields on index linked gilts are now in positive territory for the first time since 2010. That is good news for investors. As a consequence, investors’ future liabilities are likely to be more easily funded by their assets .

A few commentators have even begun to question whether the UK will be able to service its debts in the future, grabbing headlines. Yet, the UK still remains a major global economy and while the debt service burden will be increasingly heavy, it issues bonds in its own currency, can print money to pay its debts (in-extremis) and has a maturity profile with around half of its bonds maturing beyond 2030 – far longer than most major economies – reducing the short-term refinancing risks that often accompany defaults. Insurance against UK government debt default over five years implies the risk of default is negligible at less than 0.5% .

There is a school of thought, including that of the Chancellor, that the recent support for the supply side of the economy (i.e. increasing productivity and output) by incenting companies and entrepreneurs through tax reductions, may lead to higher rates of sustainable growth in the future, which will, in turn, help to reduce inflation and allow the Government to bring down debt. Obviously, this would take time. The markets currently seem unconvinced. In essence, no-one knows how this all plays out exactly. There is no doubt that there will be uncertainty ahead, but investors who own globally diversified portfolios of equities and higher-quality shorter-dated bonds are well-positioned to weather any possible storms.

The view from a bat’s perch, as we have seen, can provide useful perspective in a world full of politicians, central banks, economists, pundits and active investors all bumping around in the dark.

‘This too shall pass!’, as the late, great John C. Bogle used to constantly remind investors.

Risk warnings
This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

In News, Uncategorised

Pacem Double-Winners at the 2022 Eastside Awards

The much anticipated Eastside Awards, in association with George Best Belfast City Airport, celebrating all that is good about East Belfast, returned in 2022 with a glittering awards ceremony hosted by television presenter Tara Mills. There was double delight for Pacem as we took the titles of ‘Eastside Award for Business Growth’ and the ‘Eastside Awards Employer of the Year’.

 

The Business Growth Award was open to businesses or social enterprises operating within the East Belfast area that were able to demonstrate growth in terms of business performance and or employment. The award was sponsored by Kainos and there was much joy at the Pacem table when Kainos’ Adam Donnelly announced the we had overcome some very impressive competition to claim the title. According to the judges, this was a very difficult category to judge, and all organisations were commended. Judges were impressed by Pacem’s growth over the last three years in terms of staff numbers, client base and turnover. Our investment in staff training and development was singled out for particular praise.

 

Having won the previous Eastside Award for Employer of the Year in January 2020 (pre-pandemic) we were especially proud, and humbled, to retain the crown of East Belfast’s Employer of the Year. Entries for this award, which was sponsored by Fleet Financial, were invited from organisations who were able to demonstrate their commitment to and the provision of a positive working environment, especially in the areas of employee engagement, employee development, employee health and well-being and opportunities for growth. Judges commented that the standout for them was Pacem’s consistent, balanced focus and investment on our team’s professional and personal development, captured and managed through our ‘personal development plans’. They also highlighted our financial contribution to staff to fit out a comfortable, functional ‘working from home’ set up during and beyond the Covid-19 crisis.

 

Another proud night for Team Pacem

In Insights, Uncategorised

Tips for unsettling times

The news today can feel a little bit unsettling.  There is no doubt that these are tough emotional times for investors.  Russia’s invasion and brutal war in Ukraine is unsettling on both a human and an economic level.  The plight of the people of Ukraine and the broader pitting of Western values against totalitarian oppression weigh heavily.  The impact of the war on energy, fertilizer, commodity and food prices, combined with global supply bottle necks and continuing Covid lockdowns in China are exacerbated by the growth in money supply from quantitative easing and financial support measures taken during the pandemic. This has led to a rapid rise in inflation globally to levels not seen for several decades. That can feel uncomfortable.

From an investment perspective, the impact has been more varied than the news might suggest[1] so far this year.  Global equity markets have handed back some of the, perhaps, unexpected gains of 2020-2021, but not in a uniform manner.  Of note, high growth stocks with poor or non-existent profits have been particularly hard hit, impacting the US broad market (down 18%) and the tech-oriented Nasdaq (down 28%).  Yet, global markets, in GBP terms, are down only 10% or so.  Sterling’s recent fall against the dollar has helped, as overseas assets now buy more Pounds.  The UK equity market is more-or-less flat.  It is worthy of note that a well-constructed exposure to global value stocks has delivered gains of nearly 4% so far this year, from which diversified investors will have benefited.  A similar value outcome has been seen in emerging markets.

Over the longer time horizon that most investors face, equity assets should provide inflation-plus returns to protect the value of wealth. Unfortunately, there are no certain inflation hedges.

The fears of inflation have pushed bond yields higher, with resultant falls in bond prices.  Shorter-dated, higher quality bonds – favoured in client portfolios – have been impacted to a lesser degree than long-dated bonds.  As an example, short-dated UK gilts are down 1.5%, whereas a portfolio of all UK Gilts is down a little over 10%.  The positive is that – going forward – bonds are now yielding materially more than a year ago.

All-in-all, a well-diversified global equity portfolio, with exposure to value stocks and holding shorter-dated high quality bonds, has probably been more solid that the news might suggest, and performance certainly sits well within the bounds of expectation.

Here are some tips to help keep things in perspective at this challenging emotional time:

Tips for unsettling times

  1. Accept the uncertainty of markets – a well-diversified portfolio protects you from any one area of the markets suffering particular pressures. Your portfolio will probably be performing better than the headlines suggest.
  2. Don’t measure your portfolio’s performance from the previous top of the market, but over a longer and more sensible timeframe, and from where you started. The last few years have been really good to investors.  Giving a little back is part of any investing journey.
  3. Try not to look at your portfolio too often. Get on with more important things in your life.  Once a year is more than enough, but that takes some will power!
  4. Accept that you cannot time when to be in and out of markets – it is simply not possible. If you resign yourself to this fact, investing feels much less stressful.
  5. If markets have fallen, remember that you still own everything you did before i.e. the same number of shares in the same companies, and the same bonds holdings.
  6. Most crucially, a fall does not turn into a loss unless you sell your investments at the wrong time. If you don’t need the money, why would you sell?
  7. The balance between your growth (equity) assets and defensive (high quality bond) assets was established by your adviser to make sure that you can withstand temporary falls in the value of your portfolio, both emotionally and financially. A recent fall in the markets does not change this.
  8. Be confident that your (boring) defensive assets will come into their own, protecting your portfolio from some of the pain of material equity market falls, if they occur.
  9. If you are taking an income from your portfolio, remember that if equities have fallen in value, you will be taking your income from your bonds, not selling equities when they are down.
  10. Your adviser is there – at any time – to support you. They are a source of fortitude, patience, and discipline on which you can draw.

These are unsettling times, but your best defense is to keep to your plan, remaining invested in a well-diversified, robust portfolio and leaning on your adviser if necessary.

‘This too shall pass!’ as the legendary investor and founder of Vanguard used to say.

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale.  This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Data source

World equities (developed) iShares Core MSCI World ETF USD Acc
Emerging markets value Dimensional Emerging Mkts Val A USD Acc
Emerging markets Vanguard Em Mkts Stk Idx £ Acc
Global Value Dimensional Global Value GBP Acc
US broad Market Fidelity Index US P Acc
Tech stocks (NASDAQ) Invesco QQQ ETF
Short-dated Gilts iShares UK Gilts 0-5yr ETF GBP Dist
All Gilts iShares UK Gilts All Stks Idx (UK) H Inc

Market data used in this article represent the returns from funds capturing these specific market risks. They are provided for informational purposes only. All performance in GBP terms, except for US markets (USD).

[1] Data used in this paragraph uses market returns from funds capturing these specific market risks, as examples.  See endnote for details.

In Uncategorised

Winners Crowned at Belfast Business Idea Award 2022

Belfast-based entrepreneurs gathered at the Belfast Business Idea Award finalists’ night on Friday May 6 at Danske Bank to hear this year’s winners announced.

A Belfast City Council initiative, supported by Danske Bank and Pacem Accounting & Tax Advisory, the competition is designed to unearth, recognise and help fast track the best business ideas in Belfast. Councillor Ryan Murphy, Chair of Belfast City Council’s City Growth and Regeneration Committee said: “The beauty of the Belfast Business Idea Awards is that it’s the strength of the idea that’s assessed, rather than the achievements of the venture.  So people who have yet to set up a business have just as much chance of winning as those who’ve already started to trade successfully”.

Five winners pitched their idea to an independent judging panel, with the overall winner being decided live on the night via audience vote. The overall winner secured a cash injection of £2,500 to help their business grow. Each of the five winners also received a support package worth over £3,000.

The 2022 Belfast Business Idea Award Winners were:

  • Emma Corbett – Insurin – Overall winner
  • Eimear O’Rourke – Allergy Act
  • Harry Mc Anulty – The Plant Alchemist
  • Orla McKeating – Still I Rise Diversity Storytelling
  • Conleth Mallon – Injuiced

Speaking at the finalists’ night, overall winner, Emma Corbett from Insurin commented: “From my own experience as a type 1 diabetic, I understood that more could be done to guide and help those newly diagnosed with type 1 diabetes physically, mentally and emotionally. Insurin started out as my final year project at Ulster University whilst studying Interaction Design. Then I realised it had a lot of commercial potential, but needed help to build both the product and business – which is why we entered the Belfast Business Idea Award. I want to say a huge thank you to Belfast City Council, Danske Bank, Pacem, Innovation Factory and Enterprise Northern Ireland for their support. There’s so much talent and innovation here, so I’m honoured to win and look forward to growing Insurin with the help of the generous support package.”

The finalists also had the opportunity to hear from, and put questions to, two of NI’s most successful entrepreneurs, David Johnston and Lynsey Bennett, founders of Belfast businesses, OutsideIn and Lusso Tan which have gone on to compete, and win, on a global scale.

Speaking at the finalist’s night, Elizabeth Crossan commended all applicants and expressed her enthusiasm towards working with the winners,

“We are looking forward to working alongside the newly crowned winners of the 2022 Belfast Business Idea Award by providing six months free accountancy services. We love helping new businesses develop and grow and to play a part in their journey is a real privilege. We can’t wait to see what is in store for these blossoming businesses and predict great things ahead –  watch this space”.