After the relative calm of May, June witnessed a brutal sell off in markets around the world, and this time the UK equity market was not immune, as the FTSE 100 declined by -3.80% over the quarter whilst the MSCI World suffered a loss of -9.43% in GBP terms.
Whilst persistently high inflation remained an important theme, the focus of markets shifted decisively towards the increasing likelihood of a global recession, creating high levels of risk aversion across multiple asset classes.
Elevated inflation across many geographies, together with increasingly tough rhetoric from central bankers expressing their willingness to raise interest rates aggressively, if needed, to get inflation under control, is convincing an increasing number of investors that a meaningful global recession is both imminent and inevitable.
We have observed multiple times in recent months that the economic growth outlook has deteriorated somewhat, and that this deterioration has not been lost on equity markets, and in particular the cyclical sectors of the market.
Whilst feeling increasingly in the minority, we remain of the view that a period of significant or protracted economic weakness in the near term is by no means a certainty.
We do not base that view on unsubstantiated ‘hope’ but rather the combination of the very unusual economic starting conditions coming into this turbulence (strong consumer and corporate balance sheets, healthy labour and housing markets, pent up reopening demand post Covid etc) and the, broadly speaking, robust trading patterns of many businesses we have exposure to through our funds.
As we moved into the third quarter of 2022, we witnessed some quite extraordinary events in Westminster. Triggered by the resignations of prominent cabinet ministers, Boris Johnson finally surrendered and resigned as PM.
The stock market volatility we are witnessing once again keeps us all very much grounded, reminded that there is no reward without risk. That is something we accept.
However, the volatility within political circles is often unhelpful and recent events gives us a degree of hope that the controversy that surrounded aspects of Boris Johnson’s leadership is coming to an end. There is nothing that stock markets like less than uncertainty, and if recent events bring an end to the recent bout of political and economic uncertainty, it could be received positively by markets.
At times of stress, we need strong political leadership that unites, is forward looking and most importantly, is coherent with both a short- and long-term economic strategy.
The cost-of-living crisis, fuelled by inflation that appears to be far more resilient than most had previously anticipated, has had a significant negative impact on the sentiment of investors. This is a substantial headwind that one way or another needs to be addressed to calm markets.
Equity valuations in isolation do not look unduly expensive, especially within the pan-European and Asian regions. What we now desire going forward is a more encouraging political and macro-economic backdrop to allow the markets once again to prosper.
This Market Commentary was provided by Tyndall Partnerships. Please note, our Market Overview & Outlook is our view of markets and does not constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. Overseas investments are affected by currency movements and exchange rates. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch, telephone 01392 875500, info@SeabrookClark.co.uk