Investment Newsletter – A review of August

Having put together this month in perspective, it was obviously being prepared before the death of Her Majesty the Queen Elizabeth II, so whilst it made reference to Liz Truss becoming Prime Minister earlier in the week, you may have wondered why I made no reference to this deeply sad event.

On behalf of Adlers, we send our heartfelt condolences to King Charles III and the Royal Family.  Even though we’ve all planned for the time when the Queen would no longer be with us, having seen photographs of her earlier just last week, this news came as a shock and leaves me with a sincere sense of loss, which I’m sure we are all feeling.

To our Queen, for her unswerving and devoted service to the United Kingdom and the Commonwealth, thank you for everything.

Whilst this is more for next month’s newsletter, we now have a new PM in Liz Truss. We wait to see what her policies look like, particularly over the energy crisis.

August saw an unsettled geopolitical backdrop continue, including a visit by the US House Speaker, Nancy Pelosi, to Taiwan, which sparked tensions with China who then undertook a series of military exercises in seas surrounding the island as if to remind everybody of their military might.

Meanwhile in Ukraine, the first shipments of grain left the country since Russia’s invasion, after a deal was struck to ease the threat of global food shortages and spiralling prices of both food stuff and animal feed.

We started August with the Bank of England increasing the UK base rate by 0.50 % (50 basis points) to 1.75 % whilst it tries to fight higher inflation. This is the highest rise for a number of years and I believe we can expect a 75 basis points increase when they meet again next week. That will leave us with a base rate at 2.50 %.

You may remember the US Fed increased its interest rate by 75 basis points, bringing their benchmark range to 2.25 % – 2.50 % a week earlier. The Fed Chair, Jerome Powell, has signalled a similar hike could follow again in September.

Data from the Bank of England showed mortgage approvals totalled over 63,700 and June, although this was the lowest since June 2020 (please remember that some data takes a bit of time to be released).

Staying with borrowing, the annual growth for consumer credit accelerated from 5.8 % in May to 6.5 % in June, its highest in three years. Credit card borrowing soared by 12.5 %, the highest since November 2005 and is attributed to the cost of living crisis. Unfortunately, I can see this only going one way.

Interestingly, however from data for the first quarter of this year, people in the UK are continuing to save, this from Trading Economics, one of the world’s leading suppliers of economic data.

The average price of a home in the UK was £ 293,221 in July, down 0.1 % month on month, this the first decrease since June last year, according to research by the Halifax. This marginal drop pushes the annual rate of house price growth down to 11.8 %, although overall they remain more than £ 30,000 higher than this time last year.

Staying with the UK, construction output fell in July for the first time since January 2021 and before the pandemic lockdown. The UK Purchasing Managers Index (PMI) for the sector was down to 48.9 from the previous 52.6 reading in June. As you may know from reading previous newsletters, any reading below 50 represents a contraction in output and this was the fastest rate of decline since May 2020.

The UK composite PMI, which tracks both the manufacturing and service sector, fell to an 18 month low of 50.9 in August, down from July’s figure of 52.1.

Staying with PMI data, the S&P Global August data showed the Eurozone continuing to slide into contraction territory with the composite PMI also at an 18 month low of 49.2, down from 49.9 the month before. Supply issues, growing uncertainty and higher inflation had a damaging impact on both the manufacturing and service sector.

German retail sales fell by 8.8 % in real terms in June, the biggest monthly fall since records began in 1994, and like many households across Europe, these cutbacks come in response to the cost of living crisis.

Flash PMI data also published by S&P Global showed the US Composite Output survey was down from 47.7 in July to just 45.0 in August. This meant output across US companies fell in August at the fastest rate since May 2020.

Japan’s Flash Composite PMI dropped to 48.9 in August, down from July’s reading of 50.2.

One interesting statistic came from the United Nations Food Price Index, showing world food prices dropped significantly in July. The index average 140.9 points in July, down 8.6 points from June. Cereal prices fell 11.5 %, but it does remain 16.6 % above its July 2021 value.

Staying with some global commentary, global gross domestic product (GDP) is expected to rise by 2.8 % this year and again in 2023, though this is down from the spring growth forecasts of 3.3 % and 3.2 % respectively. GDP, if you remember, is the total monetary or market value of all finished goods and services produced within a country’s borders within a specific time period, though it can also be for a wider region, so in this case the globe.

The Eurozone recorded a GDP expansion of 0.7 % in the second quarter of 2022, quite a bit stronger than economist expectations of 0.2 % growth, this very much aided by tourism and of course, the reopening of businesses after the covid lockdowns., By contrast our own GDP fell 0.1 % in Q2, this following growth of 0.8 % in the first quarter of the year.

Onto inflation and where, across the Organisation for Economic Cooperation and Development countries (OECD), it is expected to reach 9.7 % this year before dropping back to 6.3 % in 2023, both adjustments upwards from April’s expectations of 8.2 % and 4.5 % respectively. However, the Bank of England, US Fed and the ECB all believe that by the time we get to Q4 in 2024, inflation should be back around the 2 % mark – fingers crossed.

Some more specifics, the consumer price inflation (CPI) in the Eurozone reached an all-time high of 8.9 % in July, whilst for the US, consumer prices actually fell to 8.5 % in July, down from 9.1 % the month before, surprisingly this brought on by lower energy prices!

For the UK, our inflation hit 10.1 %, its highest figure since February 1982. We’ve heard various predictions of where our inflation might end up, the financial institution Citi predicting it could reach as high as 22 %, though that would fall back very quickly!

I believe this will now rather depend on what the Liz Truss’s government comes up with as a support package, particularly with energy costs. I understand she has already ruled out windfall taxes on the energy companies who, of course, don’t actually control the gas price.  There is talk of a £ 100 billion package, however that remains to be seen.

For Asia, exports from China rose 18 % year-on-year in July, well above economist expectations of a 14 % increase. By contrast, China’s National Bureau of Statistics reported Chinese industrial production grew by only 3.8 % year-on-year in July and slower than expected, though no doubt a hangover from their zero covid policies.

Japanese manufacturers revealed new export sales continue to fall in July (for the fifth month in a row) as demand weakened. This helped pull Japan’s factory PMI down to 52.1 in July, highlighting the slower growth.

Coming back to the UK, the Office of National Statistics (ONS) reported annual growth in average pay, excluding bonuses, increased to 4.7 % in the three months to June, this against a backdrop of low unemployment and high job vacancies.

However, the real value of workers’ pay packets dropped by 3 % – the fastest decline since compatible records began in 2001 – after taking into account the ONS’s preferred measure of inflation, which includes owner occupier housing costs, the CPIH.

I’ve not referred to CPIH before in my newsletters, though I’d say this is a more comprehensive measure of inflation as it extends CPI (consumer price index) to include a measure of the associated costs of owning, maintaining and living in your own home, known as owner occupier housing costs, along with council tax.

We finished the month with the regulator, Ofgem, announcing that from 1 October the U.K.’s energy price for dual fuel will increase from £ 1,971 to £ 3,549 a year for an average British household, representing an 80 % increase. Let’s wait to see what Liz Truss does with this, which we should know by the time you read this newsletter.

Perhaps not surprisingly, imports of goods into the UK from Russia shrank to just £ 33 million in June, the lowest since records began in January 1997. This is a decrease of 96.6 % compared with average monthly imports in the 12 months before Russia invaded Ukraine in February.

I’m conscious that this all makes for gloomy reading again. Unfortunately, as nobody has a clear idea of when the bottom of the market might be, all this data is unsettling to investment markets, whilst continued rises in interest rates serves to push down the capital value of fixed interest investments such as government gilts and corporate bonds, which are simply fixed term loans to governments and large businesses respectively. A bit of a perfect storm for investment markets one might say.

Having said last month that central banks were trying to avoid giving forward guidance, in his keynote speech at the annual Jackson Hole Economic Symposium last week, the Fed chairman, Powell, bluntly warned that combating inflation would likely “bring some pain to households and businesses”, commenting that the central bank will continue to use its tools “forcefully” to bring demand and supply back into balance. Not only did this all but confirm further interest rate hikes, global stock markets fell immediately after the speech, with the worst losses seen in the US.

We obviously hope for some resolution to the Ukraine crisis with Putin’s war clearly having a major impact on global energy and food prices, but you do question that if he does turn off Nord Stream 1 and the gas supply to Europe, how long can he afford to sustain his war?

I appreciate we recently updated our portfolios, so thank you for responding to allow us to make the necessary changes – if you haven’t done so yet, please can you – and I just wanted to reaffirm that when we made changes at the beginning of this year, for those taking income we topped your cash pot up to ensure you were holding at least two years of income, which means we do not have to disinvest in these troubled times to pay your income.