June Market Update – markets yo-yo with the prospect of a recession

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For financial professionals only

What's moving markets

June began jubilantly with the UK’s four-day bank holiday weekend to celebrate the Queen’s Platinum Jubilee. The positive mood was not enough to lift the spirits of global markets which were generally negative for the month.

Equity markets were once again dominated by the two i’s – inflation and interest rates – and fears that central banks will overreact in trying to combat inflation, damaging economic growth in the process.

UK inflation hit another 40-year high of 9.1% in May, with the slight increase coming mainly from rising food, beverage and energy prices. In response, the Bank of England continued its upward trajectory hiking rates by 0.25% again to 1.25%, the highest level in 13 years. Meanwhile, retail sales were 0.5% lower for May according to the ONS, mainly driven by reduced food spending. Indeed, UK household spending power has fallen the most in 21 years with any wage increases eaten up by inflation, reminiscent of the 1970s.

Similarly, US inflation for May came in at 8.6% leading to the shock hike of 0.75% – the biggest rise since 1994. The Fed isn’t ruling out another steep hike of the same magnitude for July to at least stem demand and therefore inflation. With that, the probability of a recession in the US has increased to 50% according to Citigroup. Meanwhile, the S&P 500 Index entered bear market territory marking one of the worst periods for the index in over 50 years. Ten year US Treasury yields also reached nearly 3.5% in mid-June, the highest in 11 years before retreating to around 3.0% by month end.

For the first time in a century Russia defaulted on its foreign currency sovereign debt. The situation is unusual because they have the money to make the repayments but can’t do so due to sanctions. This comes at a time when the European Central Bank is also preparing to increase interest rates by 0.25% in July on the back of its latest inflation figures of 8.1%, though critics say they could be too late to the party. One of their bigger worries is the unpredictable oil supplies and fears they may run out of gas in peak winter if Russian supplies come to a complete halt, and this adds to uncertainty in the region.

More positively there was further easing of China’s zero covid policy which lifted Asian and Emerging Markets, but not enough to reverse the impact it’s had on global growth. The World Bank now forecasts global growth to fall from 5.7% in 2021 to 2.9% in 2022, which is significantly lower than the 4.1% growth predicted at the start of the year. This is partly on the back of China’s earlier lockdowns, but also compounded by the Russian invasion of Ukraine, continued supply chain disruptions and now a possible recession.

Asset class implications

After a prolonged period of low interest rates, excess monetary support, and positive returns from fixed interest, these assets have suffered so far this year. Longer dated government bonds have been most affected as they’re more sensitive to interest rate rises, and their downward trend continued throughout June. Although corporate bonds were in negative territory for most of the month, they ended up marginally positive when looking at the ICE BofA Global Broad Market Index. Understandably lower risk investors may be concerned by the performance of fixed interest assets this year, but at this point in the cycle, the question is not whether bonds have a place in a portfolio after the pain has been felt, but rather, do they now represent good value? We believe in the latter.

Within equity markets, both the developed and emerging markets were in negative territory in June due to heightening fears of a recession. However, Asia and Emerging Markets showed better resilience falling the least. This was helped by China in particular with the FTSE China Index rising 14.32% buoyed by China’s easing of quarantine restrictions but also recent announcements including new infrastructure spending, tax breaks for businesses, mortgage interest rate cuts and increased lending by banks. There’s now growing confidence that the Chinese economy may rebound in the second half of the year.

Elsewhere, UK Direct Property has held up exceptionally well in the volatile conditions of this year generating another positive return in June.

It’s been a challenging month for both fixed interest and equity markets. In this environment, it can be tempting to react to short term news, which rarely adds value in our view. Despite the continued uncertainty of inflation, interest rates, war and supply chain constraints, portfolios that are well diversified should prove more resilient over the longer term than those investing in a narrower range of assets.

Asset Classes in numbers

FTSE Actuaries UK Conventional Gilts All Stocks TR in GB-1.81-7.42-14.06-13.60-9.93
ICE BofA Global Broad Market Hedge GBP TR in GB0.58-0.44-4.32-4.15-6.15
IA UK Direct Property TR in GB0.732.35 5.3312.349.89
FTSE All Share TR in GB-5.98-5.04-4.571.647.41
FTSE USA TR in GB-4.80-9.72-12.04-1.1438.78
FTSE World Europe ex UK GTR in GB-7.11-8.60-15.05-10.0811.05
FTSE Japan TR in GB-3.92-6.79-10.23-8.808.22
FTSE Asia Pacific ex Japan TR in GB-2.33-3.29-5.46-11.2914.25
FTSE Emerging TR in GB-1.75-2.75-5.21-10.789.96

Source: FE Analytics, GBP total return (%) to last month end

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity.

Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.  

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