The week in review

What’s happened in markets?

The week of 13 June was an eventful week in markets with a lot of news on the economic front. A stream of central banks raised their base rates during the week, including the Federal Reserve (Fed), Bank of England (BoE) and the Swiss National Bank (for the first time in 15 years).

On Friday 17 June, the University of Michigan consumer sentiment survey said the public’s long-term inflation expectations for five years from now rose to 3.3% (up from 3.0% last month). Meanwhile, the producer price index inflation reading (a measure of wholesale inflation) declined for a second consecutive month from its peak of 11.5% in March to 10.8% in May, which was broadly in line with the 10.9% expected.

On Wednesday 15 June, as anticipated, the Fed raised its benchmark interest rate by 0.75%, its most aggressive increase since 1994. Fed chair Jerome Powell acknowledged the increase was “an unusually large one” but said he didn’t expect moves of this size to be common. He said decisions will be made “meeting by meeting” although he expects a further 0.50% or 0.75% increase in July.

Fears of an economic slowdown were also prevalent in the UK as the economy contracted by 0.3% in April, after a 0.1% decline in March. The main driver was the services sector reflecting a significant reduction in the Test and Trace scheme across the country. The BoE followed the Fed by raising its interest rate on Thursday 16 June, but by a more tempered 0.25%, taking its base rate to 1.25%. However, the central bank made clear it was ready to act “forcefully” to control inflation which is heading above 11% later in 2022.

The European Central Bank (ECB) plans to tackle its own high inflation by raising interest rates in July, for the first time in 11 years, and in September. But, in an emergency meeting on Wednesday 15 June, it promised to design a new ‘anti-fragmentation’ instrument to protect its more indebted member states from surging borrowing costs.

On the corporate front, Adobe shares fell after full-year projections fell short of analyst’s expectations.

In other news, Japan bucked the global trend for monetary tightening and spent US$72 billion across the week purchasing government notes to keep the rate at 0.25%. By comparison, this is what the Fed and ECB were doing in an entire month last year for economies more than three times Japan’s size.

The week of 13 June saw all markets down on the week. Emerging markets (-1.8%) continued to outperform developed markets (-9.2%), albeit off a low base. Although, developed markets remain ahead over the year to date. In terms of style, value (-7.9%) outperformed growth (-8.8%), while large capitalisation stocks (-8.1%) outperformed small capitalisation stocks (-9.1%). Energy (-6.0%) continued to be the big story, although even it produced negative returns over the last 30 days, while information technology (-10.4%) was the worst performer.

In fixed income, significant volatility continued as a result of the hawkish central bank interest rate decisions. The yield on the 10-year US Treasury bond closed the week at 3.32%, having almost reached 3.5% mid-week.

In currency news, the Japanese yen continued to depreciate given the Bank of Japan’s steadfast manipulation of bond yields.

What’s happened in portfolios?

The environment remains broadly supportive of risk assets but is challenging. We’ve seen significant price weakness and there will be a time when that starts to look really compelling from a valuation standpoint because the backdrop is conducive and supportive of equity markets. However, given the economic uncertainty, we now have a preference for larger capitalisation stocks, which can absorb some of the price increases. Our global large capitalisation holding, Fundsmith Equity Fund, has performed better on a month-to-date basis given its quality bias.

In fixed income, our higher quality short duration credit has led the way. However, the recent shift upwards in yields starts to make duration look more interesting. We still like credit risk but our view on high yield has been moderated given some notable macro headwinds.

Now, more than ever, we have a significant preference for real assets. They continue to be the bright spot given the clear inflation protection, attractive income, and lower correlation to the traditional asset classes (equities and bonds) that they offer. This has been reflected in portfolios year to date, where we have seen significant outperformance relative to our peers and other asset classes from real asset areas such as property, infrastructure and renewable energy. Indirect exposures have performed less well due to their higher equity beta, which means they are more impacted by equity market volatility.

Alternative strategies have also performed well as we continue to hunt out different areas we can bring to the portfolios. The asset backed lending holding SLF Realisation Fund announced a settlement of one of its loans at around a 20% premium to book value – a continuation of the orderly wind-up of the investment.

What’s happening this week?

14 June • UK Unemployment Rate | 14 June • US Producer Price Index | 17 June • EU Consumer Price Index