Market commentary – June 2022
The first half of 2022 has been a difficult period for global markets and, consequently, the majority of investors. Developed market equities have suffered from their worst first half of the year in over 50 years, with the US S&P 500 posting a 20.6% loss – the worst since 1970. Bonds also fell over the period, marking only the second time in more than 40 years that both bonds and equities have posted two consecutive quarter losses.
We have seen inflationary pressures continue, both in the UK and globally, although these are hopefully starting to peak. While fears around inflation may be starting to ease, markets are now concerned with potential recessionary risks – particularly in Europe.
Inflation vs recession
Inflation has been a hot topic for the first half of the year. A combination of post-lockdown demand, supply constraints and energy prices has seen inflation hit record highs. UK CPI hit 9.1% in May, with the eurozone hitting a record high of 8.6% in June.
This has led to central banks raising interest rates at pace. The Bank of England has increased the base rate four times this year to 1.25%, with further rises expected this year, and possibly into 2023. This has led to a decline in markets, with relatively few places to hide.
With concerns now moving towards recession, continued inflation causes a potential headache. Historically, one of the main tools used to fight recessions has been interest rates – with central banks typically lowering them to help support economic growth. With inflation continuing, this option is removed and rate rises to combat inflation can increase the risk of recession. There is hope, however, in recent UK GDP data, which showed an unexpected uptick in May, potentially providing the Bank of England with some more flexibility.
Energy markets
Commodity prices have retreated recently. In particular, oil has seen a significant drop, with prices starting to approach the levels seen before the Russia-Ukraine situation – in the global markets at least, although this still isn’t reflected at the pumps! While this may help provide some relief to inflationary pressures, the retreat is largely driven by recession fears.
Supply constraints are still a concern. Oil supply continues to suffer from troubles in Libya and ongoing sanctions on Iran. However, there is hope that OPEC production will increase, with Europe and the US now more open to other sources, for example Venezuela.
Most notably, the ongoing position in Ukraine is causing significant gas price increases in Europe. As Russia continues to cut exports, European growth is expected to be a casualty. While the US is partly insulated from this, if Europe enters recession, it is likely the US may also be dragged along.
China
China is likely to continue its zero-Coronavirus policy, at least until after the widely expected re-election of President Xi. However, there have been signs that the strict policies that impacted economic activity have started to ease.
While arguably effective at managing Coronavirus, the recent relaxation of some of these measures has helped Chinese stocks rebound towards the end of the quarter. After a difficult 2021 where the Chinese market lagged significantly behind other developed markets, 2022 has seen them amongst the top performers.
Going forwards
While inflation will likely continue to be a concern, there are some signs that this may be reaching a peak. Pressures are likely to reduce and some steps already taken may be sufficient, at least in part, to reverse the trend of increasing inflation. Markets have priced in various assumptions on inflation, in particular rate rises, and we will have to watch to see if these are realised.
Whether countries enter recession territory, and in particular the extent of any such downturn, will be a significant driver of returns over the short term. The US economy may have a soft landing, but Europe, with significant energy security risks, is potentially more fragile.
Geopolitics will, as ever, play an important role. In particular, US mid-term elections will be one event to watch, along with the prime minister leadership contest in the UK.
While it has clearly been a difficult period, historically markets have recovered strongly. As long-term investors, it is important to remain invested through times of stress. We would recommend you seek advice before taking any action. Talk to Moore Kingston Smith’s expert financial advisers today.