Markets took their cue from the start of the year in Q2 to repeat much of the weakness seen in the early months. Many of the concerns that pervaded investor sentiment in Q1 only persisted or worsened, making for particularly challenging conditions: high inflation and tight labour markets coming up against rising interest rates and stalling economic growth.
The big economic story has been inflation. At already elevated levels, any hopes of more transitory pressures were quashed as high energy costs, rising wages and broader input prices took hold. Existing supply side shocks were further compounded by China’s localised lockdowns (thanks to a zero COVID-19 approach and questionable vaccination program) and of course the ongoing conflict between Russia and Ukraine has resulted in a continuous fanning of the inflationary flame.
Inflation at current levels has not been seen in most developed economies for a generation and the wall of worry (outside of the immediate hike in living costs) for markets has focused on central bank response. It would be fair to say that this has dominated thinking. Not “will rates climb?”, but “how high, and how fast?”. It must also be noted that a sensitive touch of the controls is required. If controls are too aggressive, you run the risk of smothering growth and forcing a recession. If controls are too little, inflation could become entrenched and central banks lose credibility. Forget a ‘Goldilocks economy’, central banks have ‘become Goldilocks’ looking to get their response just right. Not too much and not too little.
This has been the story of the quarter with markets oscillating between optimism that central banks have inflation under control, to concern that a recession is looming. So to start with the bad news, it has been a very challenging quarter for risk assets. Equity markets sold off with the US leading the way, falling 16.9% on the quarter (the worst quarter since the global financial crisis), building on the losses seen in Q1 to end the half year down 21.3%. The biggest H1 decline for 60 years.
Market weakness was reflected globally with Europe (ex UK) down 8.7% in Q2 (much of it in the last month) and emerging markets down 8.1%. Only the UK stood out, with a more moderate loss of 2.9%, reflecting the more ‘value based’ constituents of the main index. With this in mind it was the ‘growth’ heavy segments of the markets that fared worst with the likes of Information Technology down 21.6% on the quarter, Communication Services off 18.1% and Consumer Discretionary down 20.2%. Contrast this with Consumer Staples, down 6% and Utilities 6.6%, and the picture is set for the direction of investor thinking over the quarter. In fact this is summed up perfectly by the performance of ‘Growth Stocks’ as a style during the first half of the year, down 27.8%, with ‘Value Stocks’ down 12% over the same period. A huge variation in performance.
Losses were not confined to traditional ‘risk’ assets with notable swings in fixed income markets as investors grappled with a changing landscape of base-rate expectations. Without exception fixed income markets suffered, with default sensitive areas such as high yield and emerging markets seeing the worst of it (down 10% and 10.5% respectively) as well as longer dated securities that are more sensitive to base-rate rises such as index-linked bonds (down 17.5% for UK Index Linked). There really hasn’t been much of a traditional ‘flight to safety’ with only the US dollar seeing real strength over the quarter (against every major currency) along with a handful of selective areas that can offer a degree of inflation protection or have unique exposure to the current environment (energy for example).
If you’re interested, Bitcoin was down a staggering 59% over the quarter.
But it hasn’t all been bad news. Challenging? Yes, but there are signs that inflation may be coming under control. Growth has dipped and investor sentiment has deteriorated but this could turn sharply if we see more evidence of inflationary control which in turn could impact base-rate expectations. Elevated inflation when inflation is still rising does nothing for sentiment, but elevated inflation when inflation is falling is very different. In other words we do not need to see inflation back at around 2.5% for things to feel very different. And so much negativity is now priced in to markets.
| INDEX | END MAY VALUE | END JUNE VALUE |
| FTSE 100 | 7607.66 | 7169.28 |
| DJ Ind. Average | 32990.12 | 30775.43 |
| S&P Composite | 4132.15 | 3785.38 |
| Nasdaq 100 | 12642.1 | 11503.72 |
| Nikkei | 27279.8 | 26393.04 |
| £/$ | 1.2602 | 1.2178 |
| €/£ | 0.8518 | 0.86093 |
| €/$ | 1.0734 | 1.0484 |
| £ Base Rate | 1 | 1.25 |
| Brent Crude | 115.6 | 109.03 |
| Gold | 1837.35 | 1807.27 |
This month’s values quoted as at 31/06/2022. The above values are sourced from Bloomberg and are quoted in the relevant currency.
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Tom was appointed in March 2021 and brings to the table over 20 years’ investment experience. Prior to joining, he was at Santander Asset Management in London for nine years, where he was, most recently, the chief investment officer for its UK business, having previously been the global head of the multi asset division. Tom also spent several years as head of multi manager and fund selection at LV Asset Management.
Tom sits within Nedgroup Investments, a sister company, which provides investment advice, research and portfolio modelling solutions to Nedbank Private Wealth. Here, he heads up the London-based investment team. It is in this capacity that he is a member of Nedbank Private Wealth’s investment committee.
Tom was appointed in March 2021 and brings to the table over 20 years’ investment experience. Prior to joining, he was at Santander Asset Management in London for nine years, where he was, most recently, the chief investment officer for its UK business, having previously been the global head of the multi asset division. Tom also spent several years as head of multi manager and fund selection at LV Asset Management.
Tom sits within Nedgroup Investments, a sister company, which provides investment advice, research and portfolio modelling solutions to Nedbank Private Wealth. Here, he heads up the London-based investment team. It is in this capacity that he is a member of Nedbank Private Wealth’s investment committee.
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