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Evolving Economics - Income and Safety Margin as Safe Havens

Professional Financial Advisor Manish Kataria comments

In my previous articles in Property Investor News in 2022 the focus was around macro uncertainty – a developing theme over the last 12-18 months as inflation has continued to rise. This article is intended to provide investors with updated guidance around the evolving - and potentially worsening - landscape we find ourselves in.      

Since my last article in July a lot has changed. The UK has a new Prime Minister, Liz Truss, wo replaced the previous incumbent Boris Johnson. Soon after, following the passing of Queen Elizabeth II, we saw in a new head of state in King Charles III.   

These are important historical events. At the same time, we are also witnessing significant macro-economic developments.   

Inflation is at 40-year highs, having reached double-digit levels. In a rather belated response, interest rates are being hiked at an aggressive pace, on both sides of the Atlantic. Bond yields are shooting up in reflection of this. Stock markets have sold-off in fear of a central bank-induced recession. Sterling has collapsed to a 37-year low against the US dollar, touching record lows at the time of writing, and is threatening to reach parity against the dollar.    

Usage of the word “unprecedented” spiked during the Covid crisis in 2020. If things continue this way, we might see it emerge into our daily conversations again, particularly if a deep recession materialises alongside persistent inflation – the dreaded stagflation.  

Even crude oil is now below its level when Russia first invaded Ukraine. Traditional safe havens such as government bonds and gold have failed to live up to their label. That may be understandable for bonds which have faced their twin enemies of rising rates and inflation. The ultimate safe haven asset is cash. However, with official inflation near double-digit rates (and unofficial versions plausibly double that), cash is eroding fast.   

Given such developments, how should investors now approach things? If these conditions persist or deteriorate, investors should focus on safety margin over speculation and income over capital gains.  

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