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Capital Markets Update: June 2022

Octopus1 July 2022

Market updates from June

In a Nutshell

As the first half of 2022 ended, we have so far seen a very different picture to 2021. The conflict in Ukraine has resulted in a major security threat, the recovery from Covid-19 has been affected by supply-chain disruptions and increasing inflation has resulted in monetary tightening by central banks. However, as the year continues to progress there is some hope that these factors have now been priced in, potentially presenting opportunities for long-term investors to take advantage of lower prices.

Fed Rate Rises

The trend continued in the US this month of falling prices, as its growth-heavy sectors such as technology took a beating. The S&P 500 fell approximately 7.7% in June, and -21.1% in total this year, its worst six months since 1970, thereby entering bear market territory. However, this has meant that many company stocks are beginning to look much more appealing to buyers seeking longer-term returns.

Continuing moves to counter inflation, the US Federal Reserve raised its interest rates by 0.75% to 1.5%-1.75%, instead of by 0.50% as originally expected, and noted the possibility of a more restrictive stance if inflation continued.

Although this has fueled fears of a recession in the US, there is some positive news to indicate different conditions to those seen in 2008. Consumer debt relative to GDP is still very low, with an estimated excess of $2 trillion built up in savings from the pandemic. Furthermore, corporate finances also appear to remain healthy, with good balance sheets, indicating a capacity to weather short-term difficulties.

MPC Meetings

In the UK further interest rate rises were put into place, from 1% to 1.25%. During the Bank of England’s Monetary Policy Committee meeting it was noted that the Futures market expected interest rates to rise to 3% by the end of 2022, and peak at 3.3% in 2023, before inflation was expected to settle again.

Despite contracting 4.5% since the start of the year, the FTSE 100 continues to be performing well against other equity markets, due in part from heavy energy and commodity exposure, but also due to weakening value of the pound to the dollar, which boosted the value of larger, internationally focused companies.

European Tensions

In Europe the war in Ukraine sadly passed the 100 day mark, with no quick end in sight, and Russia continued to grind forwards in the Donbas region. Markets were subdued further as concerns grew over escalating tensions, as Finland and Sweden looked set to join NATO, and Russia announced it would move nuclear-capable weapons into Belarus.

The European Central Bank (ECB) confirmed it would increase interest rates in July, ending a prolonged period of negative rates which were in place since the Greek debt crisis ten years earlier. This increase in debt financing mounted concerns for Southern Eurozone members, with the ECB offering assurances in stating it would continue its ‘anti-fragmentation’ program of purchasing countries’ bonds to reduce the risk of default.

Looking ahead

While it has clearly been a difficult six months compared to the positive returns inventors have received over the last few years, historically, markets have recovered strongly after pull backs such as these. As long term investors, it is important to not focus on the short term movements to our portfolios and generally remain invested through times of volatility. This will ensure you don’t miss any market uptick, which when it arrives will often be delivered over a relatively short period of time.

Important information:

The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation.

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