Market Update: October 2022

I think it’s fair to say that our resilience and patience as investors is being severely tested. 

During the last 5 years or so, we’ve suffered market uncertainty following the Brexit vote and the run-up to leaving the EU, COVID19, the war in Ukraine and now the impact of rising inflation on our portfolios.  

Our Politicians seem unable to focus on things that really matter, we’ve spent a year (or more) talking about whether Boris ate cake in his office or if Keir Starmer drank beer and ate curry in the company of his colleagues at the end of a working day. There appears to be a level of hysteria overtaking the Tory party, who seem to lurch from crisis to crisis with various high profile members attempting to undermine the leadership at every turn. If they change leader again they will have to call a general election which would be for Labour to lose. But let’s not be mistaken, although Labour under Keir Starmer appear to have steadied their ship they absolutely have the capacity to snatch defeat from the jaws of victory. 

And today we have a new Chancellor who has announced that pretty much all of the tax cuts from four weeks ago have been cancelled.

So how does this affect investments and markets? Will it lead to calm or further uncertainty? And how bad is the UK economy in relation to other major economies?

The UK was declared in recession as GDP (the cost of goods and services produced in the UK) fell by -0.1% in July only to be revised upwards over the last couple of weeks with the Office for National Statistics declaring that the economy grew by 0.2% over the period. We’ve now been told that the economy shrank “unexpectedly” by -0.3% in August. I’m not sure how this was unexpected as everytime I turn on the TV I’m told by some newsreader (gleefully) that we are heading for recession. This is in contrast to the US who’s economy declined over two successive quarters (-0.9% and -1.6%) and is in a technical recession. Because of soaring energy prices Europe is expected to enter recession later this year. This isn’t to say that the UK won’t follow suit, it just illustrates the point that the economic turmoil is global and not contained to the UK.    

We heard much in the last weeks about mortgage interest rates hitting 6%, the UK being in recession and the currency plummeting against the Dollar and Euro.

The reality is that in the US, mortgage interest rates are already at 6% and the Dollar has strengthened against nearly every currency worldwide. The Federal Reserve (FED), America’s equivalent to the Bank of England (BOE), has steadily raised interest rates to combat inflation and have signalled that they will continue to do so. The last weeks of turmoil in the UK has more to do with the BOE not raising interest rates in line with market expectations than the Chancellor’s mini budget. This sent a signal to the market that the BOE was not acting quickly enough to curb inflation and that as a consequence (future) rates would need to rise further for longer. 

The consequence of this was a spike in gilt yields (interest rates up, value of the gilt down) causing problems for a number of (supposedly safe) company pension schemes that had purchased interest rate swaps (a form of gambling) to meet their future liabilities. This led to a number of schemes becoming forced sellers of gilts and the BOE stepping in to stabilise the market. 

So how has the UK’s All Share performed against some of our American and European peers?

The FTSE All Share is down -12.52% YTD which compares favourably with:

Dow Jones -19.00%

DAX -22.35%

CAC -17.81%

Euro Stoxx 50 -21.93%

Although there are differences in the composition of these indices, the point I’m hoping to make is that UK investors are not the only ones suffering at the moment.

(I’ve used the FTSE All Share as it includes the FTSE mid-cap 250 which is down -28.72% YTD but not the NASDAQ -34.81% or S&P 500 -25.30%).

So where next? Most of the fund managers we talk to tell us that the companies they hold in their portfolios are making progress, have low debt and positive cash flows so it appears that although there will be headwinds (potential recession) it is mainly sentiment that is holding the markets back at this time. Investment markets tend to price in bad news early and recover quickly when news flow starts to improve. 

Although things are distinctly uncomfortable at the moment we will continue to review cash positions to make sure sufficient income is available when required. We will monitor the asset allocations of portfolios to ensure that they are fit for purpose and continue to look for lower cost alternative products and investments without compromising on quality.

There is an old investment adage “Time in the markets beats timing the market.” (Ken Fisher, founder Fisher Investments). 

Historically, the biggest falls in the market often happen just before the largest upswings. In short, when markets recover they recover quickly and you wouldn’t want to be sitting out the recovery.

If you have any questions, queries or concerns please contact us in the usual way letstalk@fathomfinancial.co.uk or call us on 0800 0438341.

Best wishes

Mark Abley