The memory is a funny thing. The recollection of events in my distant past are often clearer than those more recently. I am no expert but it seems that the teenage mind is best at creating memories, perhaps because the experiences are new.
My first Wembley cup final, (still don’t forgive Wolverhampton Wanderers) is more vivid than my last one. Often, I find myself listening to '70s music and reminiscing about the formative events of childhood. So, the news that Raquel Welch died last week was a jolt – an icon for many of my generation.
In the 1970s, I remember the UK was seen as the sick man of Europe and it seems that the epithet is now being applied again. But this time literally as well as metaphorically. Since the start of the pandemic the UK has seen a rise of over 500,000 in the economically inactive. A focus has been on the early retirees but a report by a leading pension consultancy challenges this view.
According to Lane Clark & Peacock (LCP), retirement explains none of the increase in inactivity; actually, fewer people of working age are retired now than in 2019. The prime driver is the rise in the number of ‘long-term’ sick and this trend predates the Covid crisis. Trying to understand the causes will be an important factor in getting a solution and, as my former colleague Sir Steve Webb notes, there is a real risk that government policy solutions will concentrate upon the retirement question rather than the health issue. We spend a bit less per head on health than our major European peers and a lot less than the US. It seems to me that the pressure to provide more funding for the NHS is going to grow.
This is a real challenge for the UK. As it stands, I see long-term growth materially below the levels sustained over the last 30 years. A healthier workforce will certainly help but we also need to recognise that we live in a dynamic world where capital can move easily. The decision by AstraZeneca to locate a new manufacturing plant in Ireland is a blow, particularly in a sector highlighted by the Chancellor as one of competitive advantage. The sales levy on NHS branded medicines is a case in point – good in theory but is driving investment away. The low growth prospect is one reason I think real yields on index linked gilts will stay subdued.
My relative pessimism has been challenged by recent data. UK retail sales volumes came in quite a bit stronger than expected in January, up 0.5%, although food sales volumes fell – with signs that customers were buying less because of increased cost of living. Against this background UK bond yields moved higher, reflecting a shift in rate expectations. And this was a global trend, as investors took on board continued central bank hawkishness.
10-year US treasury yields ended the week above 3.8%, back to where we started in January. In Germany and France yields ticked higher but remain below year end levels whilst 10-year UK rates moved back to 3.5%. If we look at US rate expectations, we can see that the market is pricing rates of about 5% by the end of 2023; that is a change of +50bps in just two weeks.
So, investors are feeling happier about the world: better growth prospects, moderating inflation and corporate earnings doing reasonably well. Asset classes are generally content with this outlook even if government markets have given some ground. My caution stems from my view that this relatively rosy scenario will be disrupted by slower growth than is currently anticipated. Hence my preference for investment grade debt over high yield and my increased wariness of riskier asset types. I have been extending duration a bit in my government bonds.
Back to the 1970s. The first international crisis I can remember was in Bangladesh – where floods and war gave rise to a humanitarian emergency. Today we have a reminder that natural disasters and wars are on-going features of life. I have visited Turkey and Syria and loved both countries. Let’s hope for better times ahead.
This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.