What’s happened in markets?
KEY MARKET MOVEMENTS (% change) | |||||||
1WK | 1MO | 3MO | YTD | 1YR | 3YR | 5YR | |
FTSE All Share | -1.87 | -0.38 | 1.45 | -1.43 | 0.69 | 1.85 | 3.12 |
Euro Stoxx 50 | -3.52 | -1.80 | 9.16 | -8.42 | -6.32 | 3.20 | 4.59 |
S&P 500 | -2.05 | -2.53 | -0.11 | -17.90 | -16.16 | 8.19 | 9.45 |
Japan Topix | -0.58 | -0.66 | 1.68 | 0.36 | -0.54 | 6.45 | 4.12 |
MSCI Asia Pac. | -1.90 | 2.37 | 3.25 | -19.05 | -18.32 | -0.24 | 0.31 |
MSCI Emerg. Mkts. | -2.09 | 0.55 | 1.85 | -19.89 | -19.17 | -1.52 | -0.33 |
Jo’burg All Shares | -1.97 | 0.12 | 9.37 | 3.84 | 7.14 | 13.08 | 8.88 |
UK Gov’t Bonds | -1.38 | -2.94 | -1.33 | -22.20 | -24.23 | -7.21 | -3.06 |
US Gov’t Bonds | 0.68 | 1.92 | 0.82 | -10.71 | -10.89 | -1.98 | 0.26 |
Global Corp. Bonds | 0.15 | 2.28 | 1.90 | -12.45 | -12.57 | -1.98 | 0.90 |
Emerg. Mkt. Local | -0.05 | 2.84 | 3.81 | -11.02 | -10.59 | -4.68 | -1.28 |
Figures in the respective local currencies as at the end of trading on 16/12/2022. |
The week of 12 December started well with improved headline inflation in the US. The consumer price index (CPI) data released on Tuesday 13 December showed inflation cooler than expected up only 0.1% month on month, against the 0.3% increase expected. Annual inflation at 7.1% was the lowest level since December 2021 and below the 7.3% expected. Despite this good news, the Federal Reserve (Fed) went ahead with a 50 basis point increase in interest rates later in the week. Although slower than the 75 basis point increases in its previous four meetings, Fed chair Jerome Powell released a hawkish statement stressing the need for further rate hikes to contain the inflationary pressures of a persistently tight labour market. The number of first-time unemployment claims fell last week to 211,000, a decrease of 20,000 from the previous week. Although a notoriously volatile measure, particularly around the holidays, it is not encouraging news in the battle to rein in inflation.
In the UK, the economy is estimated to have grown by more than expected in October as gross domestic product (GDP) rose by 0.5%, slightly more than the 0.4% anticipated. However, looking at the broader picture, GDP fell by 0.3% in the three months to October 2022 compared with the three months to July 2022. The Bank of England (BoE) also raised its rates by 50 basis points to a 14-year high of 3.5%. This is its ninth consecutive increase, but there was some difference of opinion within the monetary policy committee as six voted for the increase, two voted to leave it unchanged and one voted for a 75 basis points increase. Despite signs UK inflation may have peaked, down to 10.7% in November, the BoE echoed the hawkish sentiment of the Fed.
The story was the same in the EU area as the European Central Bank (ECB) also raised its key interest rate by 50 basis points to 2%. Although lower than its previous two 75 basis point increases, the message from ECB president Christine Lagarde was that rates will still have to rise significantly at a steady pace to bring inflation down to its 2% target.
In terms of corporate news, Oracle Corporation announced better than expected earnings and revenue for its most recent quarter. Revenue came in at US$12.28 billion (above the US$12.05 billion expected) and reported earnings were US$1.21 per share, up on the US$1.18 expected.In other news, Hong Kong announced an easing of its COVID-19 restrictions and improved freedom of movement following mainland China’s rapid move away from its zero-tolerance policy.It was another volatile week in markets and equity markets were down overall on the back of the hawkish comments from central banks, as investors became more concerned about the recessionary risks of tighter monetary policy.This resulted in a broad-based pullback in equity markets over the week of 12 December. Emerging market equities (+0.2%) remained just in positive territory while developed market equities (-1.4%) lagged over the last 30 days. Value stocks (-0.1%) performed slightly better than growth stocks (-2.3%), while large capitalisation stocks (-1.25%) outperformed small capitalisation stocks (-2.2%). Utilities (+4.2%) was the best performing sector, while energy (-6.9%) was the worst, as international oil prices (-11.8%) remained down at the prospect of weakening global demand and the increasing risk of recession. Although falling oil prices should offer better news for lower inflation.
In fixed income markets, government bonds did not react as expected and US Treasuries yields remained fairly flat despite the Fed’s hawkish comments. We saw something of a standoff with the bond market unconvinced the Fed will remain as hawkish as it says. Despite little change in bond yields in the US, European bond yields moved higher over the week on the much more hawkish rhetoric from the ECB.There was little change in the US dollar over the week, reflecting doubts over how much the Fed can force through in terms of interest rate hikes, and how long it would be able to keep them at a high level.
ECONOMICS | ||
Latest | Consensus Forecast | |
UK GDP (QoQ) | -0.2 | -0.2 |
UK PMI | 49.0 | – |
UK CPI (YoY) | 10.7 | – |
EU GDP (QoQ) | 0.3 | – |
EU PMI | 48.8 | – |
EU CPI (YoY) | 10.1 | – |
US GDP (QoQ) | 2.9 | 2.9 |
US PMI | 56.5 | 55.0 |
US CPI (YoY) | 7.1 | – |
What’s happened in portfolios?
The hawkish rhetoric from the Fed and the ECB later in the week started to filter through into equity markets and created a risk off environment more broadly. On the back of that, it was the defensive plays which performed best with our quality focused large capitalisation managers outperforming. They give better margin protection, a possibility of cash flows and less leverage, allowing them to weather a storm if we did start to see a recessionary outlook priced in. With the shift in focus away from inflation towards recession, those companies did particularly well.
Within fixed income, we have recently moved to a small overweight position. As inflation appears to have peaked, investor concerns have switched to economic growth which has increased demand for safe haven assets and been more supportive of fixed income. As yields have fallen, our longer duration funds both in investment grade credit and government bonds have outperformed. As with equities, the higher quality parts of the market performed best.
In terms of real assets, it was the more defensive infrastructure investments that held up well over the last week. This included Atlas Global Infrastructure, which offered good downside protection for portfolios, and the renewable names which are driven by structural tailwinds. The cyclical environment over the last week was particularly supportive of renewables, with Greencoat UK Wind and John Laing Environmental Assets Group performing well and offering a good amount of protection for portfolios. We have taken further steps to reduce the cyclicality within real assets by reducing our exposure to global REITs and UK commercial property. The receipts from these sales were moved into fixed income as another defensive move to reduce the economic sensitivity within real assets and the portfolio.
Within alternative strategies, our energy storage funds, Gore Street Energy Storage Fund and Gresham House, have had a good year and continued to provide a good level of diversification for portfolios. The volatility in energy markets has driven performance enabling them to take advantage of arbitrage opportunities, buying low and then selling higher. This has led to good revenue growth and strong net asset value updates.
What’s happening this week?
20 December • EU Consumer Confidence | 21 December • US Consumer Confidence | 22 December • UK GDP Growth Rate