Investment Update - August 2022
Global equities rebounded sharply in July as financial markets began to price in a slower pace of rate hikes in response to weaker economic growth. US companies also reported second quarter earnings which were generally better-than-expected. Falling bond yields also provided a tailwind for equity markets, which were led higher by the leading US index, the S&P 500. During July, China was the only major stock market to deliver a negative return. Further respite came from a weaker dollar and lower oil prices.
Headline inflation surprised to the upside yet again, and central banks reacted accordingly. The Federal Reserve raised rates by 0.75% while the European Central Bank and Bank of England both opted for rate hikes of 0.50%. Although headline inflation has yet to peak in the UK, the inflationary impact of the war in Ukraine is already starting to fade, with the price of agricultural commodities and oil back to pre-war levels. The exception remains natural gas prices, where prices continue to soar.
In addition to another rise in the energy price cap in October, UK investors must also consider the impact of “Trussonomics”, with her intended tax cuts and increased public spending requiring further government borrowing. The economy could receive a short-term boost, but sterling may take a further hit.
In recent weeks markets have taken the view that next year the Federal Reserve will begin cutting interest rates. While it’s possible that inflation will fall quite sharply in the second half of the year, as economic growth continues to weaken, we think this is unlikely. The Fed won’t want to repeat the mistakes of the 1970’s when inflation returned after each recession. With their credibility at stake, a recession is the price they’re willing to pay for bringing inflation back to target.
For investors, this calls for some caution. Financial markets will remain extremely volatile until inflation has definitively peaked, and central banks start to slow the pace of monetary tightening. Unfortunately, this may not arrive until early next year, when a recession could be upon us. However, as the strong performance in July demonstrates, stock markets have a habit of recognising good news long before the global economy has bottomed.
Please note: These are our views, as always, and don’t constitute advice in any way. The value of investments can fall as well as rise and past performance is not a guide to the future. The content of this publication is for information only. It does not represent personal advice or a personal recommendation, and should not be interpreted as such. Please do not act upon any part of it without first having consulted an Independent Financial Adviser.