Investment Newsletter – A review of July

You should have by now received an email with our recommendations for changes to your portfolio – apologies that this was via a blanket email, but I was keen to get this out to you as soon as possible.

I know many have already responded but if you haven’t, please could you do so as soon as possible please, as we are unable to update your investments without your agreement.  We have actioned all instructions so far except for those with Elevate accounts where we have hit a little hiccup with one of the new funds chosen.  Hopefully that will be resolved very shortly.

Outside of investment markets there was a fair bit of activity in July, Boris Johnson resigning at the start of the month, leaving now two candidates fighting for the Conservative Party leadership and, of course, the job of Prime Minister.

I’m told history has shown that of the final two candidates, whoever the MPs vote for, the wider party members vote for the other. Liz Truss is the current favourite on some polls, so let’s see if history repeats itself.

We ended the month with the excellent results by the Lionesses who, along with and in no small matter the outstanding coaching management and staff, secured England’s first football international tournament victory in 56 years. What odds for a double with the men’s team winning the World Cup? Maybe a treble with the Rugby World Cup next year!

The start of July also marked a miserable milestone for many investment markets, with the S&P 500 tumbling by 20.6 % in the first six months, something not seen since 1970, whilst the tech heavy NASDAQ has plummeted by a third this year and is on track for the biggest ever yearly drop.

By contrast, the FTSE 100 was only down 2.7 %, though this is stuffed with mining and energy companies such as BP who announced substantial quarterly profits earlier this week and this has helped it outperform other global markets, such as the more UK focused and generally better performing FTSE 250 which was down 18.9 %, whilst for other markets, France’s CAC40 was down 15.1 %, the German DAX down 19.5 % and the Euro STOXX 50 off by 19.4 %. Japan’s Nikkei 225, which I’ve previously compared to the FTSE 100 as an index that doesn’t usually keep pace with the others, was down 6.4 %.

Investment prices for the bond markets also performed badly as interest rates rose. The correlation between price and the interests they pay works a little like a seesaw, if the interest rate goes up, the underlying price of the investments fall and vice versa.

On the upside however and for the month of July, the FTSE 250 increased by 8 %, the FTSE 100 was up 3.7 % and S&P 500 was up 9.2 %. In Europe, the Euro STOXX 50 was up 7.5 % whilst France and Germany’s indexes gained 3.7 % and 1.7 % respectively, showing that markets largely shrugged off concerns about rising natural gas prices due to reduced Russian supply. The Nikkei 225 was up 5.3 % in July.

Central banks have been hiking interest rates as expected, the US Fed increasing theirs by 0.75 % to 2.25 – 2.5 %, whilst the Governing Council of the European Central Bank (ECB) increased theirs by 0.50 %, the first time since 2011 and higher than the anticipated 0.25 % rise, which you may remember my suggesting that this may well be the case in last month’s newsletter.

The ECB’s president, Christine Lagarde said “We expect inflation to remain undesirably high for some time, owing to continued pressures from energy and food prices and pipeline pressures in the supply chain.”

Talking of pipelines, I know Germany for one are doing their best to reduce their reliance on Russian gas and unfortunately as they look for other markets to buy from, this is only going to do one thing, increase prices.

As expected, the Bank of England increased UK interest rates by 0.50 % last week bringing our base rate to 1.75 %. The biggest increase in 27 years and its highest rate since 2008, this is the six consecutive increase, the BoE warning of a recession which could last for five quarters.

Historically, central banks have tentatively given some forward guidance which markets and investors lap up, but these comments can sometimes be unhelpful to markets in general, hence their decision to scale this guidance back. Data will therefore become increasingly more important for markets, for instance GDP (Gross Domestic Product), unemployment and of course, inflation.

The Fed says it will remain data dependent, which is backward looking. Moreover, it can take many months for rate increases to have a widespread economic impact. Investment market responses are, however, more immediate and as you will have seen my mentioning in past newsletters, they are forward-looking, so much so that the future markets are already pricing in rate cuts as soon the first quarter of 2023.

Notwithstanding the above and with central banks committed to bringing down inflation, there remains a concern that this could create a recession and whilst the US announced whilst I was over there that they have slipped into a technical recession (that is two quarters of shrinking GDP), the UK economy returned to growth in May, as did parts of the Eurozone where a surge in tourism has helped economies expand by more than expected in the second quarter of this year.

I wouldn’t go as far as to link all of the UK growth to consumers, however they borrowed a net £ 1.8 billion in June, up from £ 0.9 billion in May, most of which is on credit cards.

The annual growth rate for UK consumer credit rose to 6.5 %, its highest level since before the pandemic and has raised concerns that people are resorting to borrowing to fund the rising cost of living. Gas and electricity bills for some of the most vulnerable households could reach an average of £ 500 a month in January, according to BYF Group, an energy management consultancy.

Onto inflation, where energy and food represents 80 % of the increase, the UK rate rose to a 40 year high of 9.4 % in June, and 9.1% for the US, its highest rate since November 1981. It stands at 8.6 % for the Eurozone, this expected to increase to 8.9 % when the published data comes out for July.

For those holidaying in Turkey this year, the official inflation rate soared to 78.6 % in June, its highest level in 24 years. This has come about by President Erdogan’s government cutting interest rates to boost economic growth, which has pushed up costs of a country that is heavily dependent on imports, whilst putting downward pressure on the value of the Turkish lira which has fallen sharply. This means that your holiday £ should go further.

Talking about falling currency values, the euro slipped below the US dollar for the first time in nearly 20 years, reaching $ 0.99 in mid-July. The £ currently stands at around $ 1.21.

Onto the purchasing managers index, pretty much around the globe there’s a continued contraction in manufacturing and service PMIs which is pushing many sectors down and close to breaching the 50 mark which separates growth from contraction.

There is no certainty that these contractions won’t create job losses, that remains to be seen, but with rising costs, particularly energy, volatility is set to continue.

By contrast, both the services and manufacturing PMIs for China have proved better than expected, the former surging to 54.5 in June from 41.4 the month before. This is perhaps the latest evidence that China’s economy is recovering from the easing virus restrictions.

In the UK, this slowdown can be seen from recent UK retail sales data showing that rising prices are resulting in consumers reining in their spending. The scale of this however is very small, falling by 0.10 % in June following a drop of 0.80 % in May, but of course if that continues to fall …..

The only sector to see an increase was food, where sales volumes rose by 3.1 %, probably as a result of the Queen’s Jubilee celebrations.

Sales of fuel (which has seen a 42.3 % annual increase), clothing and household goods all fell sharply, and analysis shows UK consumer confidence remains at its lowest since records began in 1974.

It seems it is now more expensive to eat healthier, which is no good thing especially as a crate of lager is apparently cheaper than this time last year? That isn’t a money saving tip by the way, just an observation!

UK house prices continue to defy expectations with average property prices rising by 1.8 % in June, the biggest monthly increase since early 2007, according to the Halifax. On an annual basis, prices rose by 13 % and pushed the typical UK house price to another record high of £ 294,845.

Russell Galley, Halifax’s MD said the supply-demand imbalance continued to be the reason for the sharp increase in house prices, commenting that whilst demand is still strong, activity levels have slowed to be in line with pre-covid averages.

He went on to say that the number of available properties for sale remains extremely low and anticipates the increased pressure on household budgets and higher interest rates is likely to impact affordability and eventually slow house price growth.

I’ll finish this month with a bit of trivia. According to the latest projections from the United Nations (UN), the world’s population could rise to around 8.5 billion in 2030 and 9.7 billion in 2050 before peaking at some 10.4 billion in the 2080s. It is just under 8 billion today. It’s analysis also forecast that India is on course to overtake China as the world’s most populous country next year.

The UN also found that the global population is growing at its slowest pace since 1950 and by 2050, the number of people aged 65 years or over will be more than double the number of children under 5 years of age.