Square Mile Performance Update

Summary

Today’s investment environment is more complex than it has been in previous years. Despite the challenges, however, all is not lost for investors. We have seen inflation continue to rise across the Western world and central banks in the US and the UK are therefore continuing the path of interest rate hikes. Even the European Central Bank has now indicated an increase in the base rate next month, this will be the first lift for the bank in over a decade. The key theme in stock markets year to date has been the rotation to value areas, with most notably the energy sector significantly outperforming technology related stocks.

 

As we approach the second half of 2022, we are focused on retaining a core of high-quality companies; holding more in short-dated bonds whilst pursuing income. We also continue to hold certain inflation sensitive bonds and absolute return solutions. Despite the challenges we have experienced over the year so far, we are determined to return the portfolios to winning ways and remain very vigilant on market events and opportunities.

 

Market and performance commentary

  • May was a month of more gloomy economic news flow, with high inflation and rising interest rates dominating headlines. Both the Bank of England and the US Federal Reserve upped rates in May and June. The Fed’s May increase of 0.5% was the biggest in 20 years before it decided to increase a further 0.75% in June. The Bank of England raised by a more modest 0.25% in both months. It seems likely that both will continue on this path.
  • The rate rises are somewhat expected as the UK’s inflation rate hit a 40 year high at 9% in April, based on CPI. This was largely driven by the significant increase in the energy price cap, with another price increase in energy expected in the autumn. The Bank of England has indicated that UK inflation could hit 11% by the end of the year.
  • US inflation marginally cooled in April though it accelerated to 8.6% in May. It is now the highest it has been since 1981. Eurozone inflation reached record levels of 8.1% in May and the European Central Bank has now indicated an increase in the base rate next month. This will be the first lift for the bank in over a decade.
  • We have also seen a fall in consumer and business confidence recently which is fuelling fears of a recession, and economists suggest that the chances seem more likely in the UK and Eurozone, than in the USA which is largely self-sufficient in energy. Both the US and the Chinese economies, however, contracted in the first quarter of 2022, whilst the UK saw very modest growth over this period.
  • Now the question is whether the Chancellor’s multibillion-pound handout to UK consumers to help subsidise high energy prices will be enough to ward off a deep recession. We will not know what the result will be for some months yet.
  • The global economy is at an inflexion point; it could either tip into a recession driven by high inflation or muddle on through with the low levels of unemployment, government spending and handouts helping to support economic activity.
  • One positive for investors, the FT reported that in May, corporate executives (in the US) have been buying shares in their companies at levels not seen since the market plummeted at the start of the Covid pandemic, signalling that they believe current valuations are providing attractive opportunities, despite the short-term cyclical headwinds. This included legendary investor Warren Buffet who has taking advantage of weaker share prices in the first few months of the year.
  • The MSCI World Market Index finished May marginally weaker, down by -0.3%. In the US, the S&P 500 was down by a similar amount, whilst technology stocks continued to struggle with the tech heavy Nasdaq Index falling by 2.3%
  • The UK stock market continued to buck the trend in May with the FTSE All Share and FTSE 100 up by 0.7% and 1.1%, respectively, with commodity focused areas continuing to perform strongly.
  • Year to date, the key theme in stock markets has been the outperformance of ‘old world’ value stocks at the expense of ‘growth’ sectors, such as technology. Unsurprisingly, there has been a growing concern amongst investors as to whether their growth prospects justify the valuations. This theme continued in May with the MSCI World Value benchmark increasing by 1.6%, whilst the MSCI World Growth fell by 2.4%.
  • In bond markets, the Bloomberg Global Aggregate Bond benchmark was down by 0.2%. US ten-year treasury yields continue to rise and now exceed 3%. The UK ten-year gilt yield also rose further last month and is currently just over 2%.
  • Oil prices continue to increase, gaining $16 in May with a current price of $123 for a barrel of Brent. Gold, however, has been weak, falling over 3% from $1911 a month ago to stand at $1851 today.

Today’s investment environment is more complex than it has been in previous years. Despite the challenges, however, all is not lost for investors. It is expected that much of the bad news is already reflected in the performance of global risks assets over the first half of the year. Furthermore, the news from the Fed, China, the Russia-Ukraine conflict and market data suggests that inflation is peaking which could spark a relief rally in risk assets later in the year. Although it is almost impossible to predict, history shows that some of the best days in stock markets can follow periods of market downturns and volatility. This is why, despite the current uncertainty, it makes sense to hold onto your investments.

Today’s investment environment is more complex than it has been in previous years. Despite the challenges, however, all is not lost for investors. It is expected that much of the bad news is already reflected in the performance of global risks assets over the first half of the year. Furthermore, the news from the Fed, China, the Russia-Ukraine conflict and market data suggests that inflation is peaking which could spark a relief rally in risk assets later in the year. Although it is almost impossible to predict, history shows that some of the best days in stock markets can follow periods of market downturns and volatility. This is why, despite the current uncertainty, it makes sense to hold onto your investments.

Thank you for your continued support.

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