Market Update – September 2022
The last six months have been a challenging time for Global economies and investment fund managers alike. Although Central banks have committed to bring inflation under control, this combined with the inherent risks to the growth outlook has continued to unnerve equity and bond markets.
The uncertainty about the outlook for the global economy remains elevated and this uncertainty is especially raised in Europe. After six months of war in Ukraine there is no sign of a ceasefire, and a recession seems increasingly likely this winter as the region’s energy crisis continues to intensify. While the resumption of Ukraine’s grain exports through the port of Odessa has eased global food price pressures somewhat, Russia has continued at the same time to limit its gas exports to Europe, which together with the announcement of an unscheduled maintenance shutdown of the Nord Stream 1 pipeline, pushed average gas prices over the month to new all-time highs.
Europe
Eurozone second-quarter showed GDP growth of 0.7%, but the data revealed important divergences among member states. Those countries benefiting from the post-Covid services rebound, such as Spain, Italy and, to a lesser extent, France, generally performed well while the German economy, which is the most dependent on Russian gas imports, came to a standstill. The relative resilience of the eurozone economy in the first half of the year is also due to the fiscal measures deployed in the European Union (EU) since the start of the war in Ukraine.
However, the second half of the year looks more challenging again. Even though EU natural gas inventories reported in August were in line with the 10-year average, thanks to more liquefied natural gas imports and the reactivation of coal-fired power stations, the substantial reduction in gas flows through the Nord Stream 1 pipeline has pushed European energy prices to new heights. In this context, German producer prices increased by 37.2% in July, their biggest increase on record, and the situation could further deteriorate on the back of logistic disruptions caused by droughts and heatwaves in both Germany and China.
UK
Since our last market update, we have seen a new Prime Minister being voted in. Liz Truss has various areas in which she will need to target and her campaign suggests her economic plans will be based on lower taxes, less regulation and free trade in order to spark economic growth. We note that there is a mini budget booked for Friday 23rd, this will be interesting as it will be her government’s next opportunity to outline their plans in more detail.
A major contributor to current inflation in the UK is energy, and Truss’s first act as Prime Minister was to cap the average household energy bills at £2,500 a year for two years could have a wide-reaching impact.
We’ve seen inflation ease a little over the last month or so, although it remains at a 40-year high, mainly because of falling petrol prices. Truss’s cap could help it fall further.
Depending on other factors, it could also lead to the inflation estimates coming down significantly and a lower risk of recession in the UK. This potentially means less need for the Bank of England to use large interest rate hikes to tackle rising prices, which is what the US did. Rates should still rise in the coming months, but probably less than markets expect. For info, the Bank of England (BoE) raised its policy rate to 1.75% in August which is an increase of 1.25% since February 2022.
On the other hand, this kind of economic support from the government could, alongside other proposed tax cuts, add more fuel to the inflationary fire we’ve seen for the best part of a year now. People have more, people spend more, and prices go up.
US
In the US, even though the economy has already recorded two consecutive quarters of negative economic growth this year, some economic data published in August was quite positive.
US employment data was surprisingly strong, with 110% more non-farming jobs created in July compared to market expectations and hiring had picked up significantly across sectors while the unemployment rate fell, and wages rose.
Whilst the core inflation rate is still above the Federal Reserve’s (the Fed’s) target it does seem to have passed its peak. However with strong wage inflation numbers, this could force the Fed to raise interest rates by another 0.75% when its rate-setting committee next meets in September. The Fed’s aggressive stance continued to support the US dollar throughout the month, while weighing on equity and bond market returns. 10 year treasury yields rose sharply over the month to 3.2%.
China
In China we continue to see the domestic economy struggle with the challenge surrounding growth, covid and weather-related disruptions. Economic data over the last few months has highlighted a weakness in the housing market, disappointing retail sales and in addition, activity in the service sector also seems to have lost some momentum.
The People’s Bank of China eased monetary policy further by lowering its policy rate and furthermore, China’s State Council announced new measures worth 1 trillion yuan, to support the economy. These measures are to influence the growth of their economy and increase momentum.
Conclusion
Whilst there are many economic concerns which are likely to continue for the short term, these volatile market conditions do provide investment fund managers with opportunities to purchase assets / shares at an appealing valuation point. We may not be making major changes to the funds you hold on a regular basis but the fund managers will be making changes to the underlying assets. As always, we will be in contact if we wish to make any changes to the investment funds you hold in between reviews.
We understand many of you will still be concerned about what is happening economically, it is important not to panic and make irrational decisions. We have built well-balanced portfolios that match our clients’ needs and attitude to risk and capacity for loss which are diversified across asset classes, regions and sectors.
We will continue to monitor the situation and update you all accordingly, however if you have any queries please do not hesitate to contact us.
For clarification of any points discussed above and any future independent advice regarding your own financial planning, please do contact us on 01626 833225 or email [email protected]
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