Every month, Courtiers Financial Advisers interrogate Gary Reynolds and the Investment Team on what is happening with clients’ money, bringing your questions to their doorstep in an informal, internal meeting: the CIO Talk.

I attended this month’s CIO Talk to see what the Advisers were putting to Gary and hear his latest thoughts on the US election, the market and bonds.

First, a note on Trump

The meeting started with the Advisers pushing Gary for an opinion on Trump. Gary admitted that he thinks Trump is better for our value proposition than Harris would have been, but it’s still too early to tell what Trump’s return to power will do to asset markets.

“If you look at the stock market, it seems to like Trump. Small caps are doing well. The Investment Team added exposure to small caps earlier in the year and benefited from a rally in smaller companies.

Trump helped US companies by lowering corporation tax in his last term from 35% to 21%. He’s now saying he will cut it to 15% this term, which will favour US businesses and let them be competitive (like usual right-leaning political parties believe is the best thing to do).”

Jake Reynolds added that potential Trump policies will keep inflation high. “Reduced labour supply (due to lower immigration), increased input costs from tariffs, higher demand for goods due to tax cuts, and increased government spending will all contribute to higher inflation. This, in turn, means the strength of the dollar will need to decrease to compensate.”

As Gary said before, it’s too early to tell, but there are indications of what to expect in the future.

The US election and cutting interest rates dampened the bond market

Moving on, the Advisers were keen to hear how the Bank of England’s decision to cut interest rates and the US election result affected the equity market. However, Gary Reynolds and the Investment Team explained these factors had very little impact on the equity markets; they affected the bond market instead.

“There’s a noticeable rise in government interest rates,” Gary clarified when discussing Courtiers’ investments and the bonds in the portfolios. “We have a European Investment Bank bond maturing, and the spreads have closed. In other words, the additional interest earned from investing in something issued by the European Investment Bank, compared to, say, the UK Government, is not sufficient to justify the extra risk of being in a supranational body.”

Interest rates have risen to more reasonable levels on gilts, whereas they were previously running low. Now, Gary says, “The age of the bond bull is over. The risks are significantly to the upside regarding yields, which means they are to the downside with regard to bond prices. That, I think, is the key consideration for asset allocations going forward.”

Long-dated bonds from the US, the UK, or even the EU do not offer a premium over short-dated bonds. There is significant risk in holding long-dated bonds compared to short-dated ones, and it is unusual not to be rewarded for this risk. For that reason, bonds in our funds are kept at low levels. For example, the duration of our bond holdings in the Investment Grade Bond Fund is about two, meaning that for every one percent change in interest rates, the prices change by two percent. This is considered a very short duration.

“We’re not taking risks on the bond market. We’d rather take the risks in the equity market.” – Gary Reynolds, CIO

For a while, interest rates were dropping, which pushed bond prices up. Additionally, external factors like COVID-19 were lowering equity prices, creating a negative correlation between bonds and equities.

This made bonds extremely attractive in a portfolio because the negative correlation means you reduce portfolio volatility. They act as a sort of insurance against weak equity markets, making them even more popular. We don’t know where inflation is going to ultimately sit, but it’s unlikely to get to 11% – the level we saw when coming out of the pandemic. Oil prices may increase inflation, but overall there won’t be anything that raises bond prices coming out of the Bank of England’s decisions or the US election.

“I wouldn’t be filling my boots with long-dated gilts or long-dated U.S. Treasuries right now.” Gary admits, “Nor would I be filling my boots with High price-to-earnings tech companies. I certainly am very happy holding lots of companies with very, very low price-to-earnings, good balance sheets and decent cash flows.” Gary added. “We’re long-term investors trying to get clients to their objectives as safe as we can. We will not do that if we fill portfolios full of Tesla, NVIDIA, Amazon, these massive multiple companies.”

“Good luck if you go and make a stack of money picking a few big companies and you time it out. But just be aware that history isn’t on your side.” – Gary Reynolds, CIO

“We move through clients’ lives with a much lower degree of risk than the ‘shoot for the moon’ investors, offering them stability rather than gambits that may or may not pay off. We’re working not only with clients’ money, but also with their futures, their goals, and their emotions; we don’t take our role lightly.”

The final say

While other questions were also discussed, this concluded the conversation on bonds, the US election and Bank of England interest rates.

We have a fully integrated model at Courtiers providing us with expert insight and guidance. Each month, our Investment Team provide our Advisers with detailed market updates. If you have any questions, encourage your adviser to put forward your concerns to the Investment Team.

As ever, Courtiers is committed to ensuring your wealth can support you with your financial decisions through life. If you have any questions or need any financial advice, please let your Courtiers Adviser know, or contact us here.