What’s happened in markets?

FTSE All Share 1.09 -1.49 -1.20 -1.27 3.05 3.92 3.62
Euro Stoxx 50 0.73 -3.86 -3.87 -14.44 -11.54 3.62 3.92
S&P 500 3.68 -1.14 1.66 -13.72 -8.11 12.76 12.52
Japan Topix 1.83 1.50 0.00 0.06 -2.51 10.79 6.72
MSCI Asia Pac. -0.13 -3.12 -8.24 -19.46 -23.47 2.20 1.16
MSCI Emerg. Mkts. -0.13 -2.73 -7.69 -19.24 -22.89 1.35 0.37
Jo’burg All Shares 2.14 -1.42 0.74 -3.75 11.91 11.49 8.07
UK Gov’t Bonds -1.98 -10.56 -8.83 -21.22 -22.29 -7.51 -2.98
US Gov’t Bonds -0.66 -2.67 -1.64 -10.74 -11.66 -2.31 0.06
Global Corp. Bonds -0.44 -3.19 -2.03 -13.40 -14.32 -2.08 0.86
Emerg. Mkt. Local 0.13 -1.94 -3.08 -12.91 -16.58 -4.49 -2.13
Figures in the respective local currencies as at the end of trading on 5/09/2022.

In the UK, the week of 5 September saw the passing of Her Majesty Queen Elizabeth II and the succession of King Charles III. With a reign of more than 70 years, she was the UK’s longest serving monarch. As a mark of respect, the country entered a 10-day period of national mourning before her state funeral on Monday 19 September. One of the Queen’s last duties, on Tuesday 6 September, was to appoint Liz Truss as prime minister of the UK.

The newly appointed prime minister unveiled government plans to limit the rise in energy costs. Under the measures a typical household’s electricity and gas bills will be capped at or below £2,500 a year from 1 October and will be fixed for two years. The policy will be financed through increased government borrowing, which could add around £150 billion to UK debt.

In Europe, the European Central Bank (ECB) raised interest rates by 75 basis points. The ECB said that inflation “remains far too high and is likely to stay above target for an extended period”. On the fiscal side, many European governments are also announcing packages of support to cushion the blow of high energy prices for householders. Germany announced a €65 billion package to help its consumers.

In the US, the Institute for Supply Management (ISM) non-manufacturing purchasing managers’ index rose unexpectedly to 56.9 in August (from 56.7 in July), marking a 4-month high. This suggests the potential for a soft landing in the US. Services have been strong and especially certain components within services, as people switched more from purchasing goods to services after the pandemic. It is also encouraging as services represent a sizeable proportion of gross domestic product (GDP). On the employment front, US weekly initial jobless claims fell to 232k, marginally better than the 235k expected.

Central banks in Australia and Canada also raised their interest rates during the week of 5 September. The Reserve Bank of Australia raised rates by 50 basis points and anticipates inflation increasing further before peaking later this year. The Bank of Canada hiked its rates by 75 basis points and conveyed the view that this is not the end of the hiking cycle. However, a lot of these hikes were expected and have already been priced in by markets.

In other news, Japan, the world’s third largest economy, announced its GDP rate increased at an annualised rate of 3.5% in the second quarter (more than the 2.9% expected). Japan was later than most economies in opening after COVID-19 and only lifted its restrictions in the third quarter.

It was a quiet week in terms of corporate news with few earnings announcements. DocuSign beat expectations and shares surged by 17%. Zscaler, a cyber security company, also reported earnings that were above expectations and its shares jumped 10%.

In the markets, there was little to differentiate developed (-4.1%) and emerging markets (-2.4%), or between small market capitalisation (-4.1%) and large market capitalisation (-3.9%) stocks. Value (-2.3%) continued to outperform growth (-5.4%) over the short term. This is not surprising given the back up in government bond yields as growth stocks are more sensitive to higher yields due to their longer-term cash flows. Value stocks were supported by financials (-1.8%), that benefit from the higher interest rates, and energy (+4.2%), which continues to be the best performing sector over the last 30 days. Information technology (-7.7%) remained the poorest performer.

Short duration government bonds outperformed longer duration in the face of significant rising yields since the end of July. Yields rose on the back of further rate hikes and hawkish comments from central banks. The Federal Reserve is expected to continue to raise rates aggressively at its next meeting. Global government bonds dipped by -3.4%, investment grade by -3.4% and high yield by -2.1% over the last 30 days.

The US dollar continued to strengthen against other major currencies on the more hawkish rhetoric from the Federal Reserve and higher interest rates. As the other central banks continue to play catch up.

In terms of commodities, oil (-4.3%) has come back more recently. Natural gas futures have fallen back of late, but prices are still quadruple what they were just a year ago, which is impacting electricity prices in many countries, especially Europe.

Latest Consensus Forecast
UK GDP (QoQ) -0.1
UK PMI 49.6
UK CPI (YoY) 10.1 10.0
EU GDP (QoQ) 0.8
EU PMI 48.9
EU CPI (YoY) 9.1 9.1
US GDP (QoQ) -0.6
US PMI 56.9
US CPI (YoY) 8.5 8.0

What’s happened in portfolios?

The week of 5 September saw no real change in our broad positioning, but we continue to be more defensive within all asset classes.

Equities remain a challenging environment with clear headwinds present. We are looking to take a more defensive approach by tilting our exposure to more quality focused strategies in relation to value. In particular, the more cyclically oriented value fund Dodge & Cox has stood out given its overweight to better performing financials and healthcare sectors.

In fixed income, the significant upward shift in yields has made this asset class more attractive. The hawkish rhetoric from central banks and more robust economic data have helped yields rise further – meaning shorter duration investment grade credit funds have outperformed both our longer dated and shorter dated safe-haven government bonds.

In real assets, The Renewable Infrastructure Group (TRIG) continues to grow and diversify and announced the acquisition and development of three battery storage sites in the north of England, totalling 250 megawatts. To put this in perspective, TRIG’s £2.9 billion renewable energy portfolio generates four terawatts of clean renewable power annually. Once the first two projects are completed in 2025, the investment will represent around 4% of the portfolio (up from 1% currently).

Real assets remain attractive as an alternative to fixed income and with some inflation protection, although we are taking a more defensive approach here too by reducing our allocation to REITS, such as commercial properties, which tend to be more cyclical in nature and increasing our weighting to less cyclical exposures. We’re also looking at a small holding of gold as a means of portfolio insurance, in case of recession or stagflation. Infrastructure remains of interest given valuations and stability.

In alternative strategies, our private equity fund Oakley Capital Investments released its first half year results for 2022 with its net asset value per share up by an impressive 17% during a difficult period for markets. This was supported by a buyback of one million shares to moderate discount widening and the board remains committed to its share buyback programme. Alternative strategies remain a credible diversifier within portfolios in the current environment while most other asset classes are so closely correlated.

What’s happening this week?

13 September • US Consumer Price Index | 14 September • UK Consumer Price Index | 14 September • EU Industrial Production