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Monthly market update – June 2022

In the words of Citigroup CEO, Jane Fraser, the markets remain focused on “The three R’s: Rates, Russia and Recession". In the context of these three factors, we will talk about how global markets have behaved recently, how they may evolve and the overall current economic environment.

Current market  conditions are impeding any positive progress and inflation is taking the centre stage for this continued volatility. As long as inflation remains elevated it will weigh on corporate profitability and will limit disposable income, reducing consumer’s funds for spending. Central banks are therefore facing an unenviable task of controlling inflation while minimising the damage to the economy from tighter monetary policy – so higher interest rates, among other things. This is likely to result in countries having diverging growth paths.

Value stocks have been outperforming growth stocks since the beginning of the year, as policy makers continue to support the prospect of raising rates. A ‘value’ company is one that may have lower earnings growth but a more stable revenue.

Commodity prices, especially energy, surged after news of sanctions from the West. Russia is a major energy and commodity producer, and this spurred further concerns around supply chain shortages and inflation.

In the face of current uncertainty, we expect patches of volatility to continue throughout the year, as investors react to evolving economic data and Central Banks seek to control inflation whilst avoiding a recession.

Looking beyond this, we are optimistic that the combination of high savings rates and low unemployment will continue to benefit developed economies. Whilst periods of higher volatility can be disconcerting, it is important to consider both your investment time horizon and how your portfolio is currently positioned. The benefits of having a well-diversified portfolio become even more apparent during periods of market stress. 

US

Government spending fell and investment growth declined, but consumer spending remains resilient.

The US is expected to be less adversely affected to rising energy prices due to its lower dependence upon Russian oil imports. A recent study conducted by Morgan Stanley Asset Management indicates that the US will avoid recession this year. A tight labour market (which means a time when employers have to compete for workers), higher wages, savings accrued since the pandemic and the proposed government funded infrastructure package will assist the US economy.

Headline Consumer Price Inflation came in above expectations at 8.6%, it had been estimated to be at 8.3% year-on-year. If you exclude energy and food, the core number was in-line with expectations at 6% and fell from the previous month.

In terms of style performance, value stocks have outperformed growth stocks, while small-cap stocks lost ground to large-caps. Currently the S&P 500 index year-to-date return is -18.3%, just above the -20% performance threshold that defines a bear market. This comes on the back of concerns around higher inflation and the impact this may have on consumer spending and the prospect of higher interest rates.

The Federal Reserve started its much-awaited quantitative tightening program during the last week of May. Also last month, the Fed raised rates by 0.5%, and announced a balance sheet reduction in June, in line with market expectations. 

UK 

Inflation reached 9% in April and the Bank of England forecast that it could reach as high as 10% later this year, the highest inflation reading in the G7 and the highest inflation reading since 1982. 

In an attempt to reduce inflation, the Bank of England raised interest rates for the third time this year to 1%.

Following its latest meeting, the Bank of England has confirmed the increase of the base rate to 1.25%.

The Bank of England has also cut its forecast for economic growth and warned of a potential recession by year end. Unemployment has fallen to 3.7%, and job vacancies exceeded the number of unemployed workers for the first time on record. That said, energy prices are expected to increase further which will increase expenses  for the consumer and may see demand slow in the economy due to less discretionary spending.

Europe

The European Central Bank expects the Russia-Ukraine war to hit consumer confidence and investments, but they do not think the economy will go into recession because the Eurozone economy for the first quarter was more resilient than the market expectations.

Equity markets were generally down but were still supported by strong earnings from large blue-chip stocks. Nonetheless, fund managers remain bearish on European stocks. European Commission has cut its 2022 GDP growth forecast to 2.7%, and doubled its inflation forecast to 6.1%. The energy disruption crisis has escalated since the European leaders decided to ban the importation of Russian oil. For this purpose, the European Commission has announced a €300bn plan, called REPower EU, which will be mostly funded by unused loans from the ECB pandemic recovery program.

Inflation in the Eurozone is expected to hit 6.8% this year, declining to 3.5% next year and 2.1% in 2024. In turn, growth forecasts have been revised down, to 2.8% in 2022, and 2.1% next year. At the beginning of the year, the ECB suggested that the first-rate hike could arrive after the end of the asset purchase program, during the third quarter of the year. However, the first 0.25% increase on interest rates will take place from July, which will likely be followed by a further 0.5% in September. 

Asia and Emerging Markets

After mass COVID-19 testing was conducted in Beijing and Shanghai,  parts of both cities have returned to lockdowns. The return of restrictions underscores the difficulty of eradicating this virus, while the rest of the world starts to accept it as endemic. Nonetheless, both exports and imports in China increased in May and the Chinese Government reaffirmed its target of increasing GDP by 5.5% this year.

The Bank of Japan announced its intention to maintain its current monetary easing, which has made credit more available through lowered interest rates and deposit ratios, with the purpose of supporting the country’s economic activity. Also, Japanese authorities announced that the country is opening its border to foreign tourists in June. This follows a two-year ban which was put in place to reduce COVID-19 infections and saw tourism fall over 90% in 2020. Japan also announced its intention of reducing dependence on Russian energy. 

India’s central bank has increased interest rates to 4.9%, to address increasing inflation. Fitch Ratings has recently upgraded India’s outlook, arguing a reduction in downside risks to medium-term growth, as the country continues to show a robust post pandemic recovery.

In summary, it is a challenging economic environment for investors. However, our internationally diversified portfolios aim to seek out opportunities that will help you achieve your long-term financial planning objectives. As has always been the case, it is sometimes necessary to keep your nerve during rocky markets to achieve your long-term goals.

Note: This Market update is for general information only, does not constitute individual advice and should not be used to inform financial decisions.

Investment returns are not guaranteed, and you may get back less than originally invested; past performance is not a guide to future returns.