Rates, elections and the difficulty of timing markets

Key overview‎‎‎‎‎‎‎‎
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1. The Bank of England raised Bank Rate to 4% as higher energy costs lifted inflation risks, while policymakers themselves signalled considerable uncertainty over what comes next.

2. US midterm results could alter the political dynamics behind the Middle East conflict, potentially easing some of the same inflation pressure central banks are now responding to.

3. The result also raises the prospect of tougher scrutiny of US data-centre development, adding another potential headwind for highly concentrated big-tech exposure.
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A window of just 24 hours has demonstrated how difficult it is to time markets, even for the people setting our interest rates.

The Bank of England on Thursday raised Bank Rate to 4%, its first increase since 2023, in response to renewed inflation pressure from higher energy costs. Eight of the nine members of the Monetary Policy Committee backed the quarter-point move, while Catherine Mann wanted a larger rise to 4.25%. Inflation was 3.5% in September and could reach about 5% by mid-2027 if the energy shock persists.

At almost the same time, US voters were delivering a shock of their own. Democrats took control of both houses of Congress after an election in which the economy, the Iran war and higher fuel prices weighed heavily on Republicans. President Donald Trump acknowledged that the conflict had hurt his party, while Vice President JD Vance also blamed the war for the losses. In some ways, these factors pull in opposite directions. The kneejerk reaction in markets has been to sell off tech stocks.

Central banks seem to be tightening in response to yesterday’s supply shock just as the political drivers start to dissipate. Much of the inflationary pressure emerges from the Middle East, but a lame-duck president, an angry Republican electorate and a hostile Congress could now force a de-escalation that tempers that impulse.

For bond investors, the stakes are particularly high. Changing expectations for inflation and rates translate quickly into movements in yields and prices, creating volatility in precisely the part of a conventional portfolio many investors rely on for stability. Longer-duration bonds are more exposed to those moves, supporting ebi’s existing tilt towards shorter-duration, investment-grade fixed income.

The uncertainty was apparent even among the MPC’s most dovish members. As Bloomberg Markets Today noted, Swati Dhingra and Alan Taylor both voted to raise rates, but with reservations. Dhingra said she would need evidence of “mutually reinforcing wage and price pressures” before backing another increase. Taylor put the outlook more starkly: “The next move could be up, down, or sideways.”

The midterms also create a different risk for equity investors. Voters in at least 38 US jurisdictions approved restrictions on data-centre development amid concerns over electricity costs, water consumption and local infrastructure. Democratic candidates advocating tighter controls or greater developer accountability also won several state races. The backlash is not exclusively partisan, but it could complicate the enormous AI infrastructure build-out underpinning expectations for some of America’s largest technology companies. This resulted in sharp declines in tech stocks.

ebi’s Earth and World portfolios are naturally lighter in many of those companies than a conventional market-capitalisation-weighted global index, reducing some of that concentration risk.

For advisers, these cross-currents are the point. Correctly calling inflation would not have been enough: an investor would also have needed to anticipate geopolitics, the Bank’s response, the election and the policy consequences that follow. Diversification and deliberate portfolio construction may offer a more dependable approach than trying to trade every turn as it arrives.

ebi’s Perspective‎‎‎‎‎‎‎‎
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The past week underlines how difficult it is to position portfolios around real-time political and economic events.

ebi’s shorter-duration bond exposure helps limit volatility in the part of portfolios intended to provide stability, while Earth and World are naturally lighter in many of the largest US technology companies than the broader market.
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Ed van der Walt, CFA – Assistant Portfolio Manager, ebi

Joshua Clarke, CFA – Portfolio Manager, ebi

Jonathan Griffiths, CFA – Head of Investment, ebi

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