Investment Outlook: 3 questions you asked our expert

WE’RE now past the halfway point of the year. 2023 has certainly kept investors on their toes. Rising interest rates, sticky inflation and geopolitical tension have been challenging.

So, the latest Investment Outlook has not come at a better time.

In conversation with Ed Monk from our Personal Finance and Markets Content team, Investment Outlook author, Tom Stevenson answered your most pressing questions. Here’s three that caught my eye.

Unsurprisingly, bonds were on the radar.

1. Is now a reasonable time to switch away from poorly performing bond funds in favour of equities or balanced funds, or would it be better to be patient?

“Let's think about why bond funds might be poorly performing. Over the last 18 months, we've had a period when interest rates have been rising more than most people expected. As we know, bonds and yields or interest rates move in opposite directions. So, it’s been a bad environment for bond investors,” said Tom.

He said that patience is the right approach.

“I think that the environment is becoming attractive for bonds. So, I absolutely wouldn’t be looking to crystallise losses at this stage with the bonds,” said Tom.

“Inflation could stay, interest rates could rise further. And indeed, that’s the central assumption, particularly here in the UK - that interest rates will go quite a bit higher than they are currently. So, it might be a longer wait than people think.”

Still, in due course, it will happen because that’s the nature of cycles, they go up and down.

Property is also on the mind of investors.

2. Will the long-awaited property crash occur?

There has been a significant shift in the interest rate environment in the UK.

“Many people were enjoying mortgage rates of less than 2% relatively recently, and they're now looking at two-year mortgage rates of more than 6%. That is a significant shift and it’s bound to have an impact,” said Tom.

Fewer people are affected by mortgage rates because lots of people own their houses outright now. But the current circumstances are not particularly favourable.

The impact of the property sector depends on where you are in your life.

“We talk about the stock market in the same way. If you are coming up to retirement and you're looking to sort of cash out, then you want the stock market to be high. If you're in your 20s and you're starting to build a pension pot, you want the market to be cheap. And the housing market is no different. It depends where you are in that cycle,” added Tom.

Investment trusts are also sparking interest.

3. Hi, Tom. Are you still as confident about Edinburgh Worldwide Investment Trust as you once were? I also own a long-standing position in Scottish Mortgage and I was thinking of switching between Edinburgh Worldwide and into Scottish Mortgage. Obviously, both have been disappointing in terms of returns, but I think I have more confidence in Scottish Mortgage.

Both investment trusts are similar in some ways. First, they’re both managed by Baillie Gifford. They have a similar sort of growth orientation - a long-term one and they both invest to a degree in unquoted companies.

Recently, this exposure to unquoted companies has been a problem.

“There's been some anxiety about unquoted companies in a rising interest rate environment. The important thing to say about the Edinburgh Worldwide Investment Trust is there's a reason its approach and portfolio is included in an investment trust vehicle. That’s because it’s a long- term investment approach.”

He said that Baillie Gifford is trying to identify the winners of tomorrow - by tomorrow, they mean in ten years’ time.

“Whenever I've talked about this investment trust, I've made it clear that you shouldn’t do this on a short-term time horizon, it’s a long-term investment. It will have ups and downs and it’s been disappointing so far this year but as a long-term investment, I retain faith in it,” added Tom.

You can download the latest Investment Outlook here. 

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. The shares in the Edinburgh Worldwide Investment Trust and Scottish Mortgage Investment Trust are listed on the London Stock Exchange and their price is affected by supply and demand. The trusts can gain additional exposure to the market, known as gearing, potentially increasing volatility. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.