Global Market Overview – September 2022
September has been a pretty busy month for, not just markets, but also the real world. Here in the UK, we’ve had a decade of political and economic events crammed into a few weeks:
At the beginning of the month, Queen Elizabeth II passed away just a couple of days after she received Liz Truss, with the carnage of the mini-Budget ensuing a couple of weeks later. Since most of us live in the UK and spend money in pounds sterling, I think it’s worth breaking down some of what has happened.
• The day before the mini-budget, the Bank of England (BoE) raised base rates by 50bps to 2.25%. Despite the rise being largely expected, the fact that the BoE was out-hawked by the FED’s 75bps rise did put some downward pressure on the pound.
• The mini-budget was where the drama really began. Chancellor Kwasi Kwarteng outlined the biggest tax cuts since 1972. Income tax, national insurance, and corporation tax were all cut; energy bills were capped, and bankers’ bonuses were uncapped. Markets didn’t like this – tax cuts need to be paid for. Naturally, the pound took a dip at the prospect of inflationary policy, and Kwasi’s economically unconventional thinking led to some negative sentiment around UK assets.
• A few days later, the Bank of England came out with a surprise announcement of a gilt buying program. This was done to halt the selloff in UK assets and represents a divergence in thinking from other central banks who are moving towards quantitative tightening – albeit only in the short-term, according to the BoE. The move worked in stopping the pound’s selloff, but the longer-term impact on inflation is unclear.
What impact has this all had on UK markets?
Source: Bloomberg Finance L.P.
Despite all these UK-centric dominating headlines, UK markets really haven’t performed badly. Gilts are the worst performing UK asset where our exposure in a balanced portfolio is only 1%. And over the month, other markets have also performed poorly. European markets are down 4%, and the S&P is down around 10% - even more than gilts.
Something you may have missed:
Source: Bloomberg Finance L.P.
The chart above shows the crude oil price year to date – something much more important to the global economy than UK assets. When Russia invaded Ukraine, crude oil was at $86, seven and-a-bit months on and we’re back at $91. What does this tell us?
It’s a good illustration of supply and demand working things out. When Russia moved into Ukraine, there was an immediate shortage of supply. Prices surged in response. Fast forward to the summer, where the US and Saudi Arabia were ramping up production and demand has calmed down, and prices are pretty much down to where they were just before the invasion.
This is analogous to inflation. Prices such as the oil price, gas prices, food prices etc., add up to the aggregate price level, and the change in the aggregate price level is inflation. Different prices adjust at different rates, but eventually, they do adjust. This is a good example of that.
Over the next twelve months, we think markets will generally move sideways with volatility. In this environment, it is important to rely on a stable identity. Economic uncertainty creates fear and investor sentiment tends to overreact to economic turning points. Going forward, we believe that:
• A global manufacturing downturn is unavoidable… but the service sector should be resilient
• Inflation will fall eventually… but the short-term outlook is less clear
• Central bankers are under pressure… so the interest rate outlook changes frequently
• Corporate profit margins have peaked… but most companies will keep growing earnings
And so, investors are starting to worry about what’s next for financial markets. The next economic data aren’t likely to stabilise until the end of 2022, so ‘sideways with volatility’ is the most likely scenario for the next few months.
We know our investment identity helps us to deliver in just these kinds of environments. We have positions that can generate returns despite this volatile backdrop
Investors should try to focus on the fact that investing in the stock market over the long term, is a powerful tool to preserve the purchasing power of their wealth and on ensuring that they have an appropriate asset allocation for the level of risk with which they feel comfortable. A disciplined approach to asset allocation and identifying good active managers who can navigate these conditions successfully remains of the utmost importance.
With thanks to Seven Investment Management LLP for their views and market thoughts. RiverPeak Wealth Limited