What’s happened in markets?

FTSE All Share -3.20 -6.17 0.29 -5.96 -2.47 1.78 2.79
Euro Stoxx 50 -4.25 -8.21 -2.24 -19.67 -17.38 1.05 2.06
S&P 500 -4.63 -10.41 -2.30 -21.62 -15.73 9.02 10.01
Japan Topix -1.76 -3.81 3.62 -2.45 -3.96 8.35 5.26
MSCI Asia Pac. -4.25 -8.19 -9.37 -24.93 -26.84 -0.24 -0.51
MSCI Emerg. Mkts. -4.02 -8.25 -7.70 -24.51 -26.51 -1.10 -1.18
Jo’burg All Shares -4.16 -7.88 -1.01 -10.34 3.78 8.64 6.40
UK Gov’t Bonds -5.57 -10.71 -13.57 -25.54 -25.26 -9.72 -3.42
US Gov’t Bonds -1.16 -3.17 -3.26 -12.47 -12.90 -2.80 -0.14
Global Corp. Bonds -1.51 -3.85 -2.82 -15.38 -15.97 -2.83 0.50
Emerg. Mkt. Local -2.06 -4.25 -3.82 -16.05 -18.81 -5.62 -2.76
Figures in the respective local currencies as at the end of trading on 23/09/2022.

The US Federal Reserve announced a further interest rate rise of 75 basis points in its continuing battle against inflation and signalled further action to come. New unemployment data suggested its efforts have yet to loosen the country’s tight labour market: there were 213,000 weekly jobless claims, against a predicted 217,000.

In the UK, the Bank of England raised its rates by 50 basis points to 2.25%, the highest level since the 2008 financial crisis. Some commentators have predicted a further swift UK rate hike to help shore up sterling, which took a beating after the new chancellor Kwasi Kwarteng’s mini-budget on Friday 23 September. The package of radical tax cuts, to be funded by borrowing, saw the pound plunge to near-parity with the US dollar after the weekend, while yields on 10-year gilts passed 4%.

Consumer confidence in the eurozone slumped to -28.8, down from -25 the previous month and the lowest ever recorded. Inflation projections in Germany were stoked by a year-on-year 45.8% rise in producer prices, substantially higher than predicted. The coming week will see a flash consumer prices index (CPI) data for the region, expected to touch a record 9.5%.

Notable interest rate hikes were also announced by Switzerland (75 basis points), Norway (50 basis points) and South Africa (75 basis points). Japan alone still has negative interest rates, but the weakness of the yen forced it to intervene and buy its own currency for the first time since 1998.

The biggest news in the corporate world was Ford’s warning to investors of US$1 billion in unexpected supplier costs, a plight that may well emerge in others’ earnings. The announcement saw the company’s shares suffer their worst day in over 11 years.

Geopolitical news was again dominated by the war in Ukraine. After Ukrainian territorial gains, Russia announced a ‘partial mobilisation’ of combatants, while launching referendums to support annexation of occupied territories.

Continuing expectations of rate rises led to price drops across equities, commodities and fixed income.

Emerging markets (-7.9%) fared slightly better than developed markets (-10.8%), while value (-8.8%) outperformed growth (-12.0%). The impact was felt by both small and large capitalisation stocks (-11.3% and -10.3% respectively).

Healthcare stocks performed best (-6.9%), while property suffered (-11.3%) and information technology was hit hardest (-13.4%). EU action to impose a price cap on Russian oil led to a further price drop and a -16.4% decline in returns.

In the face of rising yields, short duration government bonds outperformed, with 1-3 year bonds dropping -1.1%, against -3.3% for 7-10 year bonds.

The US dollar continued to dominate, further strengthening its position against the euro (+2.9%), yen (+4.5%) and sterling (+8.7% before the effects of the UK fiscal announcement mentioned above).

Latest Consensus Forecast
UK GDP (QoQ) -0.1 -0.1
UK PMI 48.4
UK CPI (YoY) 9.9
EU GDP (QoQ) 0.8
EU PMI 48.2
EU CPI (YoY) 9.1
US GDP (QoQ) -0.6 -0.6
US PMI 56.9 56.5
US CPI (YoY) 8.3

What’s happened in portfolios?

In a challenging week, our global positioning and predominance of exposure to the US dollar will have sustained our portfolio on a relative basis against the turmoil created by the UK fiscal announcements.

In equities, funds such as Fundsmith Equity Fund and Morgan Stanley Global Brands have underperformed because of their overweight to the technology sector and sensitivity to higher interest rates. Conversely, the position of Dodge & Cox Global Stock Fund has been boosted by its bias to financials, with banks in emerging markets showing positive returns.

The hawkish interest rate environment is favouring short-duration fixed income. The Lord Abbett and iShares short duration funds are among those to benefit.

Real assets continue to offer an attractive alternative to fixed income and some protection against inflation. Balanced Commercial Property Trust share prices have weakened recently because of the sector’s cyclical nature. However, the portfolio gained from our purchase of further shares at 53p during the pandemic, followed by our trimming earlier this year at a high of 115p.

Among alternative strategies, GCP Asset Backed Income Fund issued its half-yearly statement. While earnings have been dented by write-downs of a loan, the fund continues to perform strongly overall and is on track to meet its 2022 dividend target of 6.325p per share.

What’s happening this week?

29 September • US Gross Domestic Product | 30 September • UK Gross Domestic Product | 30 September • EU Consumer Price Index