Market Overview & Outlook Quarter 3 2022 (1 July – 30 September 2022) – Investment Volatility Continues

Equities rose strongly at the start of the third quarter of 2022 mirroring the hot summer witnessed in many parts of the world as thermostats registered record temperatures. The rebound in equity prices in July and August can be attributed to the fact that markets had become oversold at the end of June, as well as pleasing Q2 results from a large number of companies across different business sectors. Macro economic data over the summer also supported the view that inflation may be nearing its peak in the US, which was welcomed by investors.

However, the latter part of August and September saw a reversal in equity markets as economic concerns resurfaced and positive sentiment evaporated. Overall, equity markets finished the quarter at the end of September in negative territory.

Inflation Concerns Dominate

Concerns regarding inflation continued to dominate the agenda for investors. UK inflation hit a 40 year high of 10.1% in July. With forecasts for inflation to rise significantly higher and the cost of living crisis biting, the government announced an energy price guarantee for both consumers and businesses. This measure is expected to limit higher UK inflation, at least in the short-term. Inflation pressures are also prevalent elsewhere in the world resulting in action from central banks to increase interest rates.

Increasing Interest Rates

The UK Base Rate was increased to 2.25% during the quarter, the highest level since the global financial crisis in 2008, still some way behind the US, where interest rates were hiked by 0.75% for a third consecutive rise to 3.25%. The US Federal Reserve has signalled its intention to tame inflation with steep rises in interest rates as necessary. The European Central Bank notably increased interest rates from zero during the quarter, initially to 0.5% and in September to 1.25%. The sharp differences in interest rates between the US and other countries has contributed to significant volatility in currency markets and particularly exceptional strength in the US dollar versus almost all other major currencies.

It is clear that central banks have been caught off guard with inflation and allowed it to rise significantly in excess of official targets of just 2% in the US, Eurozone and UK. Interest rates are consequently being raised with the aim of regaining control of inflation.

Inflation has resulted in the cost of goods and services increasing and reducing living standards in many parts of the world. The challenge for central banks and governments is how to rein in inflation, so as to restore stability to the global economy via higher interest rates and potentially changes in the tax system, whilst also maintaining economic growth.

Risk of Recession

The concern for investors is that if interest rates rise too far too quickly economic growth will stall and contract resulting in a recession. Indeed, some commentators have drawn parallels with the 1970s and a period of stagflation, where inflation remains stubbornly high and economic growth is subdued. Against such a backdrop, living standards are eroded and nobody benefits.

Bear Market for Bonds

The increases in interest rates have not only impacted equities, but also bonds. Whilst the income yield on bonds rises in such a climate, the capital value of bonds falls. The UK government’s ‘mini Budget’ on 23rd September spooked the markets principally due to concerns regarding unfunded tax cuts; the effect was a slump in sterling and a spike in UK interest rates impacting both the mortgage market and pension schemes. The Bank of England stepped in committing billions of pounds to support the gilt market and restore stability.

Slowing Global Economy

Global supply chains have gradually started to unblock which is most welcome for businesses. However, the financial pressure which consumers are now under is likely to result in reduced spending and an overall slowing of the global economy. Over time, this should help reduce inflation as prices need to adjust to the new economic reality. In the short-term, some companies with stockpiles of inventory may experience difficulties and profit margins and company earnings may reduce.

Political Risks

The war in Ukraine has continued during the quarter and the shortage of gas in Europe is likely to be particularly acute during the winter. The path of the war remains uncertain, particularly with the announcement of a new conscription of Russian troops and Vladimir Putin’s continuing rhetoric of rushes nuclear capability. China is certainly watching events closely in the Ukraine, as tensions remain unresolved with Taiwan.

Market Outlook

With regard to the market outlook, the range of possible outcomes remains broad. However, it is likely that the autumn and winter will see continuing volatility in both equity and bond markets as investors grapple with the path of inflation and interest rates, as well as the duration and depth of any economic contraction.

In our view, it is important to maintain a balanced view of the world. Undoubtedly, in the short-term risks remain to the downside, so hunkering down in defensive parts of the equity market seems appropriate. However, sentiment will improve once inflation rolls over and markets can see a path to recovery. At this point, investors’ patience for taking a longer term view should be rewarded.

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,


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