Market update – September 2022

Summer respite coming to an end

Global stock markets rebounded over the summer, recovering some of the steep losses experienced in the first half of the year. The optimism was fuelled by continued strength in corporate earnings and some signs that inflation may have peaked, at least in the US. However, volatility returned as August drew to a close and both stock and bond markets remain under pressure. This may better reflect the unwelcome combination of high inflation and low growth that overshadows the world economy. Schroders’ economists have once again cut their forecast for global growth and now expect it to slow to just 1.5% in 2023. Apart from during the height of the Covid-19 pandemic, this would be the worst year for global activity since 2009.

Inflation not yet slain

The latest sell-off was triggered by speeches at the Jackson Hole Economic Symposium and in particular Jerome Powell’s warning that bringing down inflation would involve “pain for households and businesses.” Along with tough messages from other central bankers, this has dampened hopes that the pace of interest rate increases may be about to slow. This would be premature, especially in the US where inflation has become widespread throughout the economy – and is no longer simply a function of higher energy and food prices. Central bankers are very wary of the mistakes of the 1970s, when Fed Chair Arthur Burns was too quick to ease monetary policy - prompting further inflationary spikes.

No easy choices for new UK prime minister

Liz Truss has been chosen as the next leader of the Conservative party – and the UK’s new prime minister. She steps into a fast-unfolding crisis, with energy bills set to soar and millions facing fuel poverty. Government support will be needed, but the form and extent of the response may not be known until an emergency budget is published, likely later this month. Sterling and the UK bond markets have both been weak as the country faces the threat of even higher inflation and further interest rate rises. 

Portfolio positioning

Central banks remain more focused on tackling inflation than supporting growth and the risk of recession remains elevated. We could also see corporate earnings start to decline over the remainder of the year. In this environment, we are happy to remain underweight equities, with a clear preference for higher-quality companies. Government bond valuations now look more attractive and we are likely to gradually increase our exposure over the coming months, further increasing the defensiveness of portfolios. We think that real assets such as property, renewable energy and infrastructure have an important role to play as diversifiers. We also expect that safe-haven assets like gold and the US dollar should provide some protection in more challenging environments.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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James Brennan

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