Investment Markets Update: September 2022

September is normally a refreshing month of new school years, cooling temperatures, and the beginning of autumn. In a year that has already seen turbulence and shocking events, this September still managed to shock. First there was a new Prime Minister, followed by the sad news of the death of our Queen, and then Kwasi Kwarteng’s mini-budget and the subsequent turbulence. High levels of inflation and economic uncertainty have continued to plague the investment markets. Investment portfolios are likely experiencing volatility.

Remember, though, that investing should be performed with a long-term time frame in mind. Additionally, performance is best reviewed over years, rather than weeks or months. If you have any concerns about your portfolio and your financial goals, please do get in touch.

Read on to find out what has been happening  in investment markets.

Despite the doom and gloom statistics, financial services firm JP Morgan suggests that a global recession could be avoided as inflationary pressures ease.

UK Economy & Investment Markets

There were several pieces of big news in the UK during September.

Government & Mini-Budget

Liz Truss was appointed prime minister on 6 September after winning the Conservative Party leadership race. Just two days later, Queen Elizabeth II passed away and many businesses chose to close or limit operations as a mark of respect during a period of mourning.

During the leadership race, Truss said she’d hold an emergency budget to tackle soaring energy bills and address other economic challenges.

Newly appointed chancellor Kwasi Kwarteng delivered the “mini-Budget” on 23 September. Among the announcements were:

• Confirmation that there will be a cap on household energy bills at £2,500 a year for a household with average use for two years. In addition, the new Energy Bill Relief Scheme will provide support to businesses, voluntary organisations, and public sector organisations.
• The additional-rate Income Tax band will be abolished from April 2023.
• The cut to the basic-rate of Income Tax from 20% to 19% has been brought forward to April 2023.
• The plan to raise Corporation Tax in April 2023 from 19% to 25% has been scrapped.
• The National Insurance hike that was introduced in April has been reversed, as has the Health and Social Care Levy.
• The Dividend Tax rise will be reversed from April 2023.
• A Stamp Duty cut means that the tax will not apply to the first £250,000 of a property purchase. The threshold for first-time buyers also increased to £625,000.

The raft of tax breaks announced by the chancellor led to market volatility and the value of the pound falling against the euro and US dollar.

Inflation

Inflation also remained high – it was 9.9% in the 12 months to August 2022. In response to inflation, the Bank of England (BoE) increased its base interest rate again to a 14-year high of 2.25%.

The BoE also said that the British economy is now in a recession after contracting for two consecutive quarters.

Official wage data highlights the pressure many families are facing. While average pay (including bonuses) rose by 5.5% in August, it’s a fall in real terms once you factor in inflation.

Businesses & Mortgages

The economic situation is also affecting aspiring home buyers. Not only do rising interest rates mean repayments will be higher, but some mortgage providers have withdrawn products from the market due to concerns about potential defaults.

Many businesses are struggling with rising costs too and data suggests there could be further challenges ahead:

• The S&P Global purchasing managers index (PMI) suggests the manufacturing sector suffered its steepest downturn since the first Covid-19 lockdown as domestic and overseas demand fell.
• The PMI reading for the service sector fell to 49.6 in August, signalling that the sector is contracting.
• According to data from the Office for National Statistics, the value of sales by small businesses fell by 10% in July, when compared to the previous month. It’s the largest fall since April 2020, when lockdown restrictions were in place.

With these statistics in mind, it’s not surprising that research from the Confederation of British Industry shows a negative outlook. British manufacturers expect the biggest drop in production since the start of last year in the next three months.

European Economies & Investment Markets

European economies face many of the same challenges as the UK.

In the eurozone, inflation reached 9.1% in August. It led to the European Central Bank (ECB) lifting interest rates by a record amount to try and curb inflation – the base interest rate increased by 0.75 percentage points.

Forecasts for Germany’s economy highlight some of the obstacles to overcome. The Ifo Institute now expects the German economy to contract by 0.3% in 2023. Fears of energy shortages are also fuelling concerns, with a ZEW Institute economic sentiment tracker finding that investor morale is falling.

US Economy

Again, inflation continues to be an issue in the US. Inflation fell slightly when compared to a month earlier in August to 8.3% but it was still higher than expected. Food inflation was also at its highest level since 1979 after a 13.5% year-on-year increase.

However, payroll data indicates that businesses are still confident as employment increased by 315,000 in August.

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.