Please find below our Investment Market Update as at 28th October 2022.
The circus has left town
It is a relief that the political chaos of the last few weeks is over. Relative calmness reigns for now, and both bond and equity markets like what they see.
The FTSE 100 has risen by 1.56% over the last 5 days but as we know, this isn’t really an indicator for the UK economy. The relief bounce has been seen more in the FTSE 250 which has risen by 4.1% over the same period (figures up until the market close on 27th October). The pound vs the dollar has also risen strongly.
The rises aren’t however exclusive to the UK, with the S&P 500 rising 3.69% and the FTSE Euro first 300 index up by 2.41%.
Perhaps more startling is how UK gilts and index linked gilts have reacted. Bond yields have fallen, and values have risen, taking the heat out of the markets, for now at least.
Time to be excited?
I’m afraid not! It’s always nice to see an end to prices sliding, and a ‘bounce’ is always welcome but sadly, in our opinion, this is just a short relief rally. It appears there is no real conviction for a period of rising prices. Unsurprisingly, as I write, the markets are giving back much of what they have gained recently which is symptomatic during periods of exaggerated uncertainty.
As the heightened political news flow is tempered, attention is turning towards deteriorating economic outlooks and the corporate earnings season. It’s not all bad news, and certainly there are glimmers of hope but as expected, we are now seeing the impact of rising energy costs, inflation and interest rates beginning to bite.
Tax rises and spending cuts to come
The new Prime Minister, in a reversal of Liz Truss’s strategies, has warned that the UK faces a “profound economic crisis”. The Chancellor has spoken of making “eye-wateringly difficult” decisions on the public finances.
A report in ft.com today stated that a Treasury source said: “Markets have calmed somewhat, but the picture is still bleak. Britain is facing an economic crisis with a massive fiscal black hole to fill. People should not underestimate the scale of this challenge, or how tough the decisions will have to be. We’ve seen what happens when governments ignore this reality.”
Strap yourselves in for the ride!
We have been concerned that earnings had been quite resilient to date, and we felt that this autumn we would start to see a deterioration in earnings. This is now playing out.
In the US, shares in Meta slid more than 24% yesterday after Facebook reported another quarter of declining revenues. Earlier in the week, technology stocks tumbled on disappointing results from Microsoft and Alphabet. Microsoft posted its weakest quarterly sales growth in five years, not helped by a surging dollar.
Amazon shares dropped post market last night by 13% after it projected the slowest fourth quarter in its history. Reinforcing that it’s not just the results but the forward guidance which is giving cause for concern. Still, Amazon expect that sales will rise by 2-8%. Apple also warned of a slowdown, but it did beat its earnings forecast.
Rowing against the tide was Standard Charter who beat estimates as retail banking benefitted from rising interest rates. Deutsche Bank also beat estimates, reporting its highest pre-tax profit since 2006.
Countering the encouraging news in the banking sector is the latest update from Nat West and Lloyds. Nat West posted third quarter profits just below market expectations as higher than expected provisions for bad debt were set aside, outweighing in part, the boost they have had from rising interest rates. However, their profits were still up by 20% year on year, despite missing estimates. Lloyds posted a 16% increase in profit for the third quarter year on year.
The banks are monitoring the stress being felt by businesses and consumers very closely and expect significant fall out as increased prices feed through.
Consumer confidence follows suit
It is no surprise that sentiment is deteriorating, and we can see evidence of this all around us. In the US, consumer and business confidence is being hit. In August and September, the consumer confidence index rose but it’s once again on the decline again.
The biggest reason appears to be inflation concerns. Whilst energy inflation has declined, core inflation in goods, particularly food was continuing to be elevated.
Interestingly, the data showed that purchasing plans for big ticket items such as cars and houses increased, though expenditure on holidays decreased. On the whole though, The Federal Reserve will be pleased because the data points to the jobs market beginning to cool with less jobs being plentiful.
Here in the UK, consumer confidence has fallen to the lowest since record began in 1974.
On the face of it, there is not much to be upbeat about.
At the very least, what is happening across the world is unsettling but in pure investment terms, the worse the economic and corporate news flow gets, the more evidence there is that the polices of central banks are working. The slower the economic activity, the more we have unemployment, the less stress we have on wage rises. The aim is to be sure that, once and for all, the inflation goose has been cooked. It appears that it’s starting to work.
It may seem strange for central banks to damage their own economies but after delivering extraordinary stimulus, probably for far too long, its essential that inflation is conquered. It is clear they will do whatever it takes to stop inflation being elevated.
The forecasts for inflation suggest that we are not far away in percentage terms from the anticipated peak of inflation. It’s not so much now about how high inflation will rise, but how long it will be elevated for. As we move along the curve, the closer we get to slower increases in interest rates. This could well be the catalyst for markets to turn. Lower earnings will make price/earnings ratios attractive at a time when economic data is absolutely awful. As I often say, investment markets are forward looking indicators.
Thematic investing is still in vogue
Despite the chaos, thematic investing is still attracting positive inflows despite adverse market conditions according to the latest Wisdom Tree Thematic report, covered by Investment Week.
They report that year to date, it is climate change and sustainability themes that have continued to resonate the most with investors. Interestingly, it is sustainable energy production which has seen the largest positive net inflows.
Cybersecurity and Artificial Intelligence were the only technology themes that have gathered significant net inflows though. Pierre Debru, Head of Quantitative Research and Multi Asset Solutions at Wisdom Tree said “Thematic fund flows remain positive across Europe, despite the risk off sentiment. We view this as an indication that thematic investing have taken a strategic place in investors’ portfolios, rather than just being used as tactical exposure”.
He went onto say “the significant flows in to climate change and sustainability themes demonstrate that ESG (Environmental-Social-Governance) related strategies still have a role in portfolios regardless of the current market conditions”.
We really are in a washing machine of uncertainty and, periodically, we find ourselves cascading into a ‘fast spin’ cycle. It’s unnerving and unpleasant for sure. Sadly, economic and corporate data is likely to get worse but remember when the news flow is terrible, historically that’s the best time to invest.
The markets are likely to get worse before they get better and hence the weighted cash positions across our in-house portfolios. We are poised ready to deploy this cash when we believe the time is right.
Have a great weekend.
Gary and the Blue Sky Investment Team
Please Note: This communication should not be read as giving specific advice regarding your personal circumstances. This would only be given following detailed assessment of your individual needs. The value of investments may fall as well as rise; you may get back less than invested. Past performance is not necessarily a guide to future returns.