Market commentary: May 2023
Portfolio performance
The global battle against high inflation, rising interest rates, and fears of economic recession influenced investment returns over the last year. Markets do not like worries and uncertainty so it’s not surprising that our client overall portfolio returns for the year were near to 0% and only slightly positive for the last 6 months. Australasian and International shares performed moderately, and international fixed interest and Property & Infrastructure ended with unrealised losses.
The AI arms race, and US government debt ceiling negotiations are current issues that investors are mulling over. And last week we had “Musk gets the go-ahead for a human brain-implant trial”, “Chinese hackers are spying on US infrastructure”, and “Oil majors are under pressure as climate protests heat up”. All very interesting but at the end of the day sensible investing boils down to owning good businesses with a proven track record, competent management, and predictable cash flows.
The US debt ceiling crisis
Tense negotiations and brinkmanship between Democrats and Republicans have made for sensational headlines around the possibility that the US government would run out of money and default on Treasury bonds. It’s a big deal as we’re talking about US31.4 TRILLION dollars, and US Treasuries are regarded as the safest investment on Earth.
The debt ceiling is the borrowing required to fund the shortfall to cover US government spending, including social security, health, income security, Medicare, and the military.
Joe Biden wanted to raise the debt ceiling to fund spending plans. Republicans dug their heels in and insisted that any deal must not raise taxes and must cut spending. It became a game of political football with huge stakes - made more difficult as the Democrats no longer have the majority in the House of Representatives.
Default would mean the US government would be unable to make payments that fund a quarter of the US economy. It would also mean payments not being made on US Treasury bonds (which underpin the global financial system) triggering a Wall Street meltdown of historic proportions. Interest rates would rise, and recession and job losses would follow. It would be financial apocalypse.
After a month of long days and late nights of contentious negotiations, US President Joe Biden on Sunday 28 May finalised a budget agreement with the House Speaker Kevin McCarthy to keep the debt ceiling at $31.4 trillion until 1 January 2025. The House passed the bill last Wednesday and the Senate on Thursday. Phew! Financial apocalypse averted…
Richard Grimes, CERTIFIED FINANCIAL PLANNER (CFPCM), Director and Financial Adviser