What’s happened in markets?

FTSE All Share -2.79 1.53 3.32 -2.16 3.55 3.56 3.29
Euro Stoxx 50 -4.87 1.95 0.92 -13.99 -9.10 5.02 3.28
S&P 500 -5.04 -2.31 -8.06 -17.60 -6.66 12.39 11.88
Japan Topix 0.51 4.34 7.46 -1.26 1.68 10.33 6.49
MSCI Asia Pac. 0.58 6.42 -2.59 -13.06 -21.72 5.02 4.08
MSCI Emerg. Mkts. -0.53 5.10 -3.56 -13.52 -21.45 3.74 3.43
Jo’burg All Shares -4.37 1.32 -7.07 -5.99 5.39 9.04 9.14
UK Gov’t Bonds -2.05 -5.36 -8.47 -14.31 -13.38 -3.70 -1.20
US Gov’t Bonds -1.27 -1.04 -6.33 -9.87 -9.69 -0.85 0.54
Global Corp. Bonds -1.73 -1.15 -6.06 -12.36 -11.99 -0.29 1.43
Emerg. Mkt. Local -2.45 1.54 -5.27 -11.17 -16.75 -2.72 -0.83
Figures in the respective local currencies as at the end of trading on 10/06/2022.

The week of 6 June saw the release of stronger than expected inflation figures in the US, with the consumer price index for the year to May at 8.6%, up from 8.3% in April, and the highest level for over four decades. Core inflation, which excludes the most volatile food and energy components, only eased to 6.0% from 6.2%, remaining higher than anticipated. This upset markets and led to a sell-off in global bonds and equities alongside increased expectations of more aggressive interest rate hikes from the Federal Reserve.

In the UK, total retail sales for May year-on-year declined by 1.1% as consumers continued to cut spending in the face of the cost of living crisis. This was the second consecutive month of declining retail sales and a sharper slowdown than the 0.3% reported in April. On the political front, UK prime minister Boris Johnson narrowly survived a vote of no confidence but failed to draw a line under the ‘partygate’ issues, as 41% of Conservative MPs voted against him.

The European Central Bank (ECB) continued to signal a rate rise of 25 basis points in July, but surprised markets by hinting at a 50 basis points increase in September, if the inflation outlook does not improve, which could see rates move into positive territory for the first time in eight years. The EU nations finally imposed a partial embargo on the import of crude oil and petroleum products from Russia.

The World Bank downgraded its global growth forecast to 2.9% in 2022, significantly lower than the 4.1% it expected in January. This was put down to the disruptive effects of the war in Ukraine, a fading of post-pandemic demand and the withdrawal of fiscal and monetary policy support.

Despite its zero-Covid policy and ongoing lockdowns, China’s exports surged to 16.9% in May from a year earlier, beating estimates of 8.0%. While in Germany, factory orders unexpectedly contracted 2.7% month on month against a predicted 0.4% gain.

Tightening monetary policy continued around the word in an effort to control inflation. In a hawkish move, the Reserve Bank of Australia hiked rates by 50 basis points, which was more than expected albeit off a very low base.

Corporate news was fairly limited over the week of 6 June, although major US retailer Target cut its profit outlook for the second time in three weeks as it adjusted its inventories to account for changing consumer demand.

In other news, OPEC+ agreed to increase oil production in July and August to try and address the current supply and demand imbalance; however, this did not exhaust the recent rally in oil prices.

The week of 6 June was a difficult time for markets both on the equity and bond side. Emerging markets (+4.7%) performed better than developed markets (-0.2%) over the last 30-days for the first time in a while, possibly reflecting the recent easing of lockdowns in China. Although it is unclear whether this can be sustained while China continues to enforce its zero-Covid policy. In terms of style, growth (+0.6%) was slightly ahead of value (+0.3%), while small capitalisation stocks (+2.5%) outperformed large capitalisation stocks (+0.3%). By sector, energy (+10.9%) remained the best performer on the back of the surging oil prices, while consumer staples (-4.4%) was the worst performer.

In fixed income, the hawkish rhetoric from central banks and the higher than expected US inflation have caused a strong sell-off in bond markets in June so far and a continued rise in bond yields, with the 2-year treasury note now above 3%, causing government bonds to lag behind.

In terms of currencies, the Japanese yen remains weak and fell to a 20-year low against the US dollar given the Bank of Japan is one of the few central banks that is not tightening its monetary policy.

Latest Consensus Forecast
UK GDP (QoQ) 0.8
UK PMI 53.1
UK CPI (YoY) 9.0
EU GDP (QoQ) 0.6
EU PMI 54.8
EU CPI (YoY) 8.1 8.1
US GDP (QoQ) -1.5 -1.3
US PMI 55.9
US CPI (YoY) 8.6

What’s happened in portfolios?

There’s been little change in portfolios week on week. It remains a reasonable environment for equities, but we do expect the volatility to continue. We retain our preference for developed markets – although cognisant of recent geopolitical risks in Europe and have moderated our overweight there recently. We also see some challenges in the UK due to potentially persistent inflation.

In global equities, the TT Emerging Markets Equity Fund has made gains over the past month – helped by its overweight to energy and materials, and its exposure to Chinese technology holdings.

It’s a less favourable environment for fixed income assets. However, with the recent shift upwards in yields, we’ve been adding to duration incrementally over the year to date and reducing credit risk. We’re making the transition from taking credit risk to taking more interest rate risk as we’re getting paid more, and also increasing the credit quality of the portfolio.

Real assets still appear attractive as an alternative to fixed income and with some inflation protection. Our Target Healthcare REIT has been solid over the month, benefiting from rents linked to inflation. It is also due to join the FTSE 250 index on Monday 20 June – which will help liquidity and sentiment.

Alternative strategies remain preferable in the current environment to provide a credible diversifier within portfolios, particularly as equities and bonds are so highly correlated at the moment. Our private equity holding Oakley Capital Investments announced the sale of its stake in German cloud hosting platform Cobtabo. The transaction represents a 105% premium to the stake’s carrying value at the end of March and adds 17p to the company’s net asset value per share.

What’s happening this week?

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