• The challenges that markets faced at the beginning of the year have been more damaging than most would have predicted. Central banks have indicated a faster, more aggressive rate-rising path that markets have had to quickly reprice. In Ukraine, the threat of Russian aggression translated into an awful full-scale invasion of its democratic neighbour. This is all set against a backdrop of rising inflation in the ‘West’ and rising disruptions from COVID in the East.

  • There is increasing downward pressure on growth, continued disruptions from Covid (particularly in Asia) pervade, supply chains remain interrupted and rising energy costs will combine to stymie growth. Offsetting this are strong consumer balance sheets, low unemployment levels and rising wages. Lower growth and higher inflation are the order of the day and the threat of recessionary risks are building.

  • Interest rates are rising to combat the creeping incumbency of inflation and the pace of rate rises remains the primary concern for markets. Central banks’ moods have undoubtedly hardened and recent geopolitical events are not going to stop them tightening policy. If quelling inflation means pushing economies into recession, then that is a price they are prepared to pay. The Federal Reserve will quickly raise rates through this year and next. The Bank of England has been ahead of the rest but will remain ‘forceful’ in their approach. The ECB is set to raise rates too, whilst the People’s Bank of China is already easing policy. The big (unanswered) question is what impact this will have in 12/18 months’ time when economic growth is expecting to be slowing sharply. Can a soft landing be managed, or will central banks push their economies into recession?

  • Fixed income markets have offered little in the way of protection. The US 10-year yield rose to almost 3.5%, before dropping back to 3% by quarter end and the UK 10-year has risen from 0.97% in January to 2.3% by the end of June. Credit spreads have also moved wider through the course of the year. Whilst we continue to use strategic bond funds and short-dated fixed income funds to reduce the impact from rising yields, they too posted deeply negative returns.

  • In equities, the UK fared relatively well versus global peers (helped by its exposure to energy and financials), particularly against US equities, albeit the strength of the US dollar helped soften the loss in sterling terms. Chinese equities have fallen by c40% from their Feb ’21 peak but there are nascent signs of a turnaround. The consumer discretionary and technology sectors saw the biggest falls. Value investing as a strategy has served to protect better year to date, whereas ‘growth’ investors, who have enjoyed so many years of outperformance, witnessed some significant price declines.

  • Currencies have been moving in step with the actions of each country’s central banks. US dollar strength continues as firmer interest rate rises have come to the fore. The Euro has also strengthened. The outlier remains the Bank of Japan which is determined to keep its accommodative policies in place, which has seen the yen weaken substantially, particularly against the US dollar.

  • During the quarter, the price of Brent Crude oil rose peaking at $123/barrel before dropping (not that you’ll have seen it at the petrol station) to $110. Gold dropped below $1810/oz as rising interest rates and a strong US dollar are historic foes.

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