Investment Newsletter – A review of September

I started last month’s newsletter by announcing that Liz Truss had become the UK’s new Prime Minister and we would wait to see what her policies looked like, particularly over the energy crisis. Well it’s safe to say that the investment market didn’t like her Chancellor, Kwasi Kwarteng’s unfunded tax cuts announced in his all but mini budget.

In last Fridays covering email with our budget summary, which I hope you found of interest, I said I felt Liz Truss and the Chancellor might have to shift on some of the budget announcements and despite the Prime Minister initially saying she was not for turning, there was a climbdown on the removal of the 45% tax band, but not before the Bank of England launched a temporary bond buying programme in an attempt to restore orderly market conditions.

The bond buying programme relates to government gilts which is how the Bank of England gets money into or out of the money supply. Most notably and after the financial crisis, you might remember quantitative easing, which was the Bank of England issuing and then buying government gilts to inject cash into the market, which they then hoped would be spent to keep the economy moving.

I also mentioned last week that government gilts are supposed to be a lower risk asset class, however this year they have been anything but. The correlation between the price of a gilt and its yield work in opposite directions, a seesaw effect if you like, so if the yield increases, the price falls and regrettably for government gilts year-to-date, their value has fallen by 25%, according to the FTSE Actuaries UK Conventional Gilts All Stocks index!

This isn’t the only index that has suffered, the more UK focused FTSE 250 has also dropped 25% so far this year, as has the US S&P 500, whilst the US Dow Jones is down 20% and the NASDAQ, the US index more in line with tech companies, has fallen by 32%. In Europe, the French CAC 40 is down over 17% whilst the German DAX 30 has lost 24%. By contrast, the FTSE 100 and Japan’s Nikkei 225 indexes which normally underperform the others are down around 3.7% and 10% respectively.

One of the few beneficiaries this year has been the US dollar which has stayed strong against pretty much all currencies and not just our own, which news reports often fail to mention, though it did dip below $1.04 last week before recovering once the Chancellor shifted on his additional tax rate cutting policy. It is worth pointing out that the US dollar is the reserve currency of the world and is used in large quantities by many central banks and large financial institutions for investments, other transactions and international debt obligations. A large percentage of commodities are priced in dollars, causing other countries to hold the currency to pay for these goods.

Staying with the currency markets, Japan’s central bank had to intervene for the first time since 1998 to buy yen to help arrest a sharp decline, the yen falling to a 24 year low against the US dollar.

The mini budget also caused havoc in the mortgage market with many bank and building society mortgage packages being axed, whilst some new rates have hit a 14 year high, leaving many homeowners worried that they won’t be able to afford their mortgage payments when their current fixed rate scheme ends. I would point out that the UK isn’t alone with higher mortgage costs, the US is similarly seeing its highest rates in over a decade, again something I’ve not heard mention on news programmes.

One bit of relief for most is the energy price guarantee which came into effect last Saturday, this replacing the Ofgem energy price cap. This guarantee limits the annual bill for a household with typical consumption levels to £2,500 a year for the next two years. It is, however, worth pointing out that this is not a cap on the bill size, those who use more energy will pay more, those who use less will pay less.

The money for this guarantee will come by way of extra borrowing by the government, which leaves the argument that the government should be applying a windfall tax on fossil fuel firms, which is something that the European Union has agreed on, where they expect to raise €140 billion from this exercise, to help people and businesses struggling with higher energy costs prompted by Russia’s invasion of Ukraine.

Regrettably, my central heating uses oil and not gas, so unlike a number of readers, we’ve seen the price go from 28.5p a litre two years ago to at one point over £1, it currently sits at around 90p. I’m keeping my fingers crossed for a mild winter!

On interest rates, the Bank of England once again lagged behind the European Central Bank (ECB) and the US Fed, both who increased their rates by 0.75%, whilst the Bank increased our rate by 0.5%. It has come in for criticism from some quarters that a) the Bank has been too slow in moving forward with interest rate increases and b) have not increased them by enough. Our interest rates now stands at 2.25%, its highest level since 2008.

As mentioned above, the US dollar is a reserve currency, so perhaps we shouldn’t be surprised that the increase in their interest rates would also have the impact of strengthening the dollar against other currencies. Regrettably, there are many goods we pay for in dollars, oil amongst them.

On oil, the price of a barrel of Brent crude at the end of September stood at around $90 a barrel, it had been up as much as $123 in early May, according to Statista, a German company specialising in market and consumer data.

Our rate of inflation dropped to 9.9% last month, this helped by the fall in oil prices, whilst in the US it dropped to 8.3% for the same reason. However, inflation for the Eurozone hit a record 10% in September, ahead of expectations and up from 9.1% in August. In Germany, inflation was at levels not seen in 70 years and this has led to expectations of another significant rate hike from the ECB when they next meet.

I’ve been asked by a few people of late about investing and whilst timescales can be important, though bear in mind I wouldn’t recommend anybody invest money they may need in the next five years, there doesn’t seem to be any point in waiting for the bottom of the market, though there could be an argument to invest your money in tranches.

Indeed, for those companies whose shares have been badly affected by the sell-off this year, for many their cash flow remains strong and there seems to be little noise of profit warnings, including those companies in the out-of-favour growth sector and whilst the talk about recession hasn’t gone away, there is some consensus that any recession may be limited to a technical one rather than the full-blown event, though that remains to be seen. By the way, a technical recession is one where gross domestic product (GDP) falls two quarters in a row. That doesn’t mean to say there hasn’t been any growth in those quarters, the growth just isn’t as much as the quarter before.

Our own GDP grew by 0.2% in January, according to the Office for National Statistics (ONS), though it was below the 0.4% growth forecast by economists.

China’s economic growth is expected to lag the East Asia and Pacific region this year for the first time since 1990, according to the World Bank. Citing Covid-19 outbreaks and difficulties in the real estate sector, it cut its 2022 GDP forecast growth to 2.8%, it was predicted to be 5% in April and this is down from 8.1% reported for 2021.

There was a mixed picture for China manufacturing activity, with the official purchasing managers index (PMI) back in positive territory at 50.1 – if you recall from previous newsletters, a reading of above 50 shows growth in a particular sector.

Staying with the PMIs, growth in the US services sector offered more evidence that the economy there was in better health than implied by the previous two successive quarters of negative growth – the technical recession I was just referring to. The Institute for Supply Management’s (ISM) non-manufacturing PMI – an indicator of business activity – edged up to 56.9 in August, this reflecting stronger order growth and employment, whilst also indicating an easing of supply chain bottlenecks.

However, data from S&P Global showed Eurozone business activity contracted again in August, with the composite PMI falling to 48.9, whilst the services PMI declined to 49.8.

For the UK, the Flash UK PMI Composite Output Index, which tracks activity across the economy, has dropped from 49.6 in August to 48.4 in September, a 20 month low and showing an economic contraction. September’s Industrial Trends Survey from the Confederation of British industry (CBI) said the difference between UK manufacturers that expected a rise in output over the next three months and those expecting a fall, dropped from -2% in August to -17% in September.

The ONS also reported that the value of sales by UK small businesses fell 10% in July, the largest monthly fall since April 2020 when it fell 24%, this showing consumers have reduced their spending as a result of higher inflation, particularly in relation to food and fuel prices.

I’ll finish this month with a few extra bits of data including the Nationwide, who reported UK house prices rose 0.8% in August, notably higher than analyst expectations.

Shop price inflation rose 5.1% year on year in August, according to data from the British Retail Consortium (BRC). This was an increase from July’s 4.4% and the highest rise since 2008. Food prices increased by 9.3%, with the cost of milk, margarine and crisps most heavily affected after farmers were hit by soaring prices due to the war in Ukraine.

Consumers borrowed an extra £700 million on their credit cards, according to the Bank of England, an increase of 13% in the 12 months to July and the fastest increase in credit card borrowing since 2005.