9th June 2022
general
New Measures Announced
After the government was heavily criticised for the Spring Statement’s lack of help for lower income households, a new package of support has now been announced.
£15 billion has been promised, partly funded by a £5 billion windfall tax on energy companies. The main measures are as follows:
The new scheme does not address every problem, but it does offer more support to lower income families than the previous measures. Of course, critics suggest it is too little, too late, and too superficial, particularly as the £400 grant will benefit even the wealthiest households.
The cost to energy companies must also be taken into consideration, as this will impact their profits and share prices. This is not just a concern for wealthy investors, as many ordinary people will have pension funds partly invested in these companies.
Rising Interest Rates
The UK interest rate rose again in May, with the current Bank of England rate now 1%. This is the highest rate in many years, and a further review is due in June.
This reflects a global trend of rising interest rates, with further increases to the US Fed rate expected before the end of the year.
The goal of increasing interest rates is to keep inflation under control, but central banks must also be careful not to stifle growth. It is a delicate balancing act, and speculation around this has caused much of the market volatility in recent months.
With rates on the rise, it may be a good time to clear debt or lock in a fixed rate on your borrowings.
Why is the UK Market Resilient Just Now?
After several years lagging behind the global economy, the UK stockmarket has proven to be pretty resilient through the recent turbulence.
It is well worth holding UK stocks as part of a diversified portfolio, but just because the tide is now in our favour does not mean that this will remain the case. There are multiple factors at work that influence the ebb and flow of the economy.
For example, the UK market is well known for its value stocks in industries such as oil and gas and banking. Value stocks have come into favour recently as investors seek steady dividends and move away from riskier ‘growth’ industries such as technology. But growth industries look to the future, and may have more rewarding long-term prospects than some of the traditional industries on which the UK economy is based.
We must also consider currency fluctuations. The Dollar is currently strong relative to Sterling, which means that overseas earnings appear more profitable when converted back to pounds. A weak pound might boost exports, but it is not an indicator of a thriving economy.
Are We Heading for a Recession?
Speculation about an upcoming recession appears in the press on a daily basis. The problem with economic cycles is that it is difficult to pinpoint where we are now – the statistics only become clear when we can look back.
A recession occurs when economic growth shrinks for two successive quarters. The UK is not yet officially in recession, but the likelihood is that it will be if the current trend persists to the end of the second quarter.
While we couldn’t have predicted a pandemic or a war, we do know that a recession occurs roughly every ten years. There may be catalysts, but really there are multiple factors at work that play out in a generally predictable pattern.
This will not be the first recession that we have survived, nor will it be the last. The strongest growth usually occurs after a recession which means that the economy is dependent on these peaks and troughs.
The UK Market
The UK All Companies sector has achieved growth of 0.5%1 over the last month, which is reasonable considering the turbulence in the global market. While the majority of the world’s stock markets have produced losses on a 6 month basis, the volatility in the UK has been fairly modest.
Top performers this month include Moonpig, ContourGlobal, and Standard Chartered. The worst performers include Hostmore, Quilter, and Carnival. The returns are very mixed with no clear trend over which industries are thriving.
The Global Outlook
The US market has seen significantly more volatility, with losses of 3.1% on a one month basis. As the US economy is dominated by growth giants such as Microsoft, Amazon, and Apple, rising interest rates and resulting migration to ‘value’ investments, has sent ripple effects through the market.
Europe and Japan have produced an overall positive return over the month, although both have seen significant volatility in the last 6 months.
The Asia Pacific market, led by China, faces continuing volatility. The country’s zero-Covid policy is still impacting global supply chains. However, significant spending on healthcare and infrastructure could help to give the economy a boost.
Please don’t hesitate to contact a member of the team for more information on any of the topics covered.
