June Market Update

What’s moving markets…

Equity markets were once again dominated by inflation and interest rates – and fears that central banks will overreact in trying to combat inflation, damaging economic growth in the process.

UK inflation hit another 40-year high of 9.1%, with the slight increase coming mainly from rising food, beverage and energy prices. In response, the Bank of England continued its upward trajectory hiking rates by 0.25% again to 1.25%. Meanwhile, retail sales were 0.5% lower according to the ONS, mainly driven by reduced food spending. UK household spending power is falling with any wage increases eaten up by inflation.

Similarly, US inflation came in at 8.6% leading to the shock hike of 0.75%. The Fed isn’t ruling out another steep hike of the same magnitude for July to at least stem demand and therefore inflation. Meanwhile, the S&P 500 Index entered bear market territory marking one of the worst periods for the index in over 50 years. Ten-year US Treasury yields also reached nearly 3.5% in mid-June, the highest in 11 years before retreating to around 3% by month end.

For the first time in a century Russia defaulted on its foreign currency sovereign debt. The situation is unusual because they have the money to make the repayments but can’t do so due to sanctions. This comes at a time when the European Central Bank is also preparing to increase interest rates by 0.25% in July on the back of its latest inflation figures of 8.1%, though critics say they could be too late to the party. One of the bigger worries is the unpredictable oil supplies and fears they may run out of gas in peak winter if Russian supplies come to a complete halt, adding to uncertainty in the region.

More positively there was further easing of China’s zero-Covid policy which lifted Asian and Emerging Markets. The World Bank now forecasts global growth to fall from 5.7% in 2021 to 2.9% in 2022 - significantly lower than the 4.1% growth predicted at the start of the year. This is partly on the back of China’s earlier lockdowns, but compounded by the Russian invasion of Ukraine, continued supply chain disruptions and now a possible recession.

Asset class implications…

After a prolonged period of low interest rates, excess monetary support, and positive returns from fixed interest, these assets have suffered so far this year. Longer dated government bonds have been most affected as they’re more sensitive to interest rate rises, and their downward trend continued throughout June. Although corporate bonds were in negative territory for most of the month, they ended up marginally positive when looking at the ICE BofA Global Broad Market Index. Understandably lower risk investors may be concerned by the performance of fixed interest assets this year, but at this point in the cycle, the question is not whether bonds have a place in a portfolio after the pain has been felt, but rather, do they now represent good value? We believe in the latter.

Within equity markets, both the developed and emerging markets were in negative territory in June due to heightening fears of a recession. However, Asia and Emerging Markets showed better resilience falling the least. This was helped by China in particular with the FTSE China Index rising 14.32% buoyed by China’s easing of quarantine restrictions but also recent announcements including new infrastructure spending, tax breaks for businesses, mortgage interest rate cuts and increased lending by banks. There’s now growing confidence that the Chinese economy may rebound in the second half of the year.

Elsewhere, UK Direct Property has held up exceptionally well in the volatile conditions of this year generating another positive return in June.