Investment Markets Update: June 2022

The first few really hot days of the year came in June – a welcome distraction, even if rain followed! Kate Bush was back on the radio thanks to Stranger Things on Netflix, and some semblance of normality returned with Glastonbury Festival opening for the first time in 3 years. But what about global investment markets and economies?

Unfortunately, rising inflation and concerns about recession risks continued to place pressure on households and affect economies around the world.

The World Bank has slashed its 2022 global growth forecasts from 4.1% to 2.9%. The organisation also warned the global economy is at risk of experiencing stagflation, where economic growth is stagnant, but inflation is high.

As an investor, you may be worried about the effect the current investment markets and economies could have on your portfolio and long-term plans. Remember, short-term volatility is part of investing, and you should focus on investment performance over years rather than months. If you have any questions, please contact us.

UK Economy & Investment Markets

Inflation & Economy

Once again, inflation reached another 40-year high in the 12 months to May. The rate of 9.1% is slightly higher than the 9% recorded the previous month.

The conflict in Ukraine is significantly affecting both energy and food prices. This is likely to place pressure on household budgets.

The latest economic data has led to some experts suggesting the economy will be stagnant, or even contract, in the coming quarters. The British Chambers of Commerce now expects GDP to contract by 0.2% in the last three months of 2022, while the CBI has warned there is a risk of a recession.

The Bank of England (BoE) increased its base interest rate for the fourth time this year to 1.25% in a bid to tackle inflation. The Bank also commented that it expects inflation to hit 11% in October.

Cost of Living

In May, former chancellor Rishi Sunak unveiled a package of measures designed to support families through the period of high inflation. This package will be paid for through a one-off windfall tax on energy firms. British Gas has criticised this step saying it will “damage investor confidence” while the industry is trying to build up green energy supplies.

Rising inflation is affecting both consumer and business confidence.

According to a survey from the Office for National Statistics (ONS), three-quarters of British adults are worried about the cost of living crisis.

It’s not surprising that many households are feeling anxious about their financial security. Further ONS data found that once inflation is considered, regular pay, which excludes bonuses, has fallen by 2.2% in the last 12 months.

A consumer confidence index from GfK suggests that people have a gloomier outlook now than they did during the pandemic or the 2008 financial crisis.

Businesses

The Institute of Directors’ economic confidence index found that business confidence is at its lowest level since October 2020, which was just before the successful Covid-19 vaccine trial results were released. The pessimism links to inflation and the effects of Brexit.

S&P Global’s purchasing managers index (PMI) data shows the current situation is affecting businesses:

• In May 2022, UK factory growth expanded at its weakest rate since January 2021 when Covid restrictions were still affecting operations. Weak domestic demand, falling exports, disruptions to supply chains, and rising costs are to blame for the slowdown.
• The service sector is also experiencing weak growth as rising prices squeeze profit margins.

However, Mike Ashley, chief executive of the Fraser Group, continues to expand his retail empire despite the challenges facing the sector. He has purchased online fashion retailer Missguided out of administration in a £20 million deal.

Transport Strikes

Strikes across the UK are affecting business operations as well.

Public transport has been particularly affected, with train and Tube strikes expected to continue over the summer months. Barristers are also striking over legal aid fees, while other unions, including the country’s largest teaching union, are considering balloting members.

There are many reasons why workers are striking, but pay failing to keep up with inflation is among them.

The aviation industry is also facing staff challenges. A shortage in workers has led to flight chaos across the country. Hundreds of flights have already been cancelled as airlines and airports struggle to operate effectively with fewer employees. It’s left some holidaymakers stranded or out of pocket.

European Economies

Factory growth in the eurozone hit an eight-month low. Germany, often seen as a European powerhouse, saw factory orders fall by 2.3%. It’s the third consecutive monthly fall and could suggest the country will enter a recession.

While the European Central Bank (ECB) has been slower than the BoE and Federal Reserve in the US to increase interest rates to tackle rising inflation, it’s possible that it will act in July. The plan will see key rates increase by 0.25 percentage points. It’s the first time the ECB will have increased interest rates in more than a decade.

US Economy

Inflation in the US reached a four-decade high in the 12 months to May 2022 at a rate of 8.6%.

Matching the pattern seen in the UK and Europe, US factory growth also slowed. Production rates and new orders are still increasing but at a slower pace. Again, falling demand and a shortage of some essential materials has caused this.

In previous months, business confidence has remained high despite the challenges. However, the rising number of jobless claims in the US could indicate that companies are letting staff go.

Thank you for reading. We hope this summary of investment markets and economies has been informative. If there are any aspects of this post that you would like to discuss, please do contact us.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.