I often say to clients during our review meetings that I still see the ongoing pandemic as being the main contributing factor to the performance of the investment markets at this moment in time. This was seen in November, when the new Covid-19 variant, Omicron, changed investors’ sentiment around the world. The discovery of the new variant of the Covid-19 virus in South Africa saw all the main global equity markets generally fall over November. The fear, from an economic point of view, is how this variant will affect the recoveries that we have seen so far this year.
In the UK, news of the Omicron variant caused concerns over both the UK’s and the global outlook for their respective economic recoveries. It will also be interesting to see if this news will have any impact on UK monetary policy and its future direction.
Consumer Price Index (CPI) is on the rise
During October, the CPI continued to increase on the back of rising prices for energy, fuel and the second-hand car market. The year-on-year CPI figure rose to 4.2% in October, compared to 3.1% in September. This has increased the likelihood of an interest rate rise in the very near future. As we have reported in previous reviews, the Bank of England (BoE) do not expect these inflationary pressures to subside any time soon. They have predicted that we could see a figure as high as 5% by April 2022.
Base rate remained the same in the UK
Somewhat surprisingly, the BoE did not increase the base rate in their November meeting, leaving it unchanged at 0.1%. Members of the Monetary Policy Committee (MPC) voted 7-2 in favour of no change. However, the BoE Governor, Andrew Bailey, made it very clear that it had been a narrow escape in the meeting as to whether they should have been raised. It is now widely expected that the base rate will rise in the very near future, with the next MPC meeting due in December. However, it will be interesting to see if the new Omicron variant will have any bearing on their decision making in the short term. During November the FTSE 100 index fell by 2.5%.
In the US...
A similar tale can be seen in regards to inflationary pressures. Much like us, higher energy prices and food prices are driving up inflation. During October, the US consumer price inflation went to 6.2%. Unlike the BoE, the Federal Reserve System (Fed) seems to be looking to take a patient view in regards to inflation. They expect the inflationary pressures to continue into next year but are predicting that they will fall back during the second or third quarter of 2022. With this in mind, The Fed has indicated that they can take a watching brief in regards to any thoughts of tightening interest rates. In November, The Dow Jones Industrial Average Index was shaken by the Omicron variant news and fell by 3.7%.
In the Eurozone...
The same issues were in play as in the UK and US. Rising energy prices saw the Eurozone’s rate inflation hit a record high 4.9% during November. Much like The Fed, the European Central Bank does not intend to raise its rates at this time. Their fear is that any policy tightening could have an impact on the economic recovery in 2022. For this reason, they have so far indicated that an increase in 2022 is unlikely to be seen. Meanwhile, in Germany, Olaf Scholz is set to succeed Angela Merkel as Chancellor. This follows a coalition agreement between the SPD, the Greens and the FDP. Germany’s Dax Index fell by 3.8% during November.
In the Far East...
Japan’s economy saw an annualised fall of 3% in the third quarter. Supply chain issues undermined export activity, consumption and capital spending. Over the month of November, the Nikkei 225 Index went down by 3.7%.
Many investment targets are set as x% above inflation and this is because you need to achieve an investment return at least equal to inflation to maintain the purchasing power of your funds.
This is the issue with keeping funds in cash, which many regards as risk-free whereas generally, any interest earned is less than inflation, so funds are falling in value in real terms. As noted above in much of the western world and indeed elsewhere, the increased energy costs and food costs are fuelling rises in inflation. Investments will need to work harder.
For those still in the accumulation phase where the emphasis is mainly on capital growth, the aim will be to ensure that the investment managers have reacted to this and have holdings in sectors that do well in inflationary times.
For those who have moved into the decumulation phase and are seeking at least some income, then a refocus of your investments may be required to be able to continue to draw income without impacting too greatly on the capital value. If these issues are worrying you then we are available to review your portfolio and your wealth planning and reassure you or make adjustments as necessary
As always, I hope that you find this market review useful. If you have any concerns regarding your investment and the impact of the Omicron variant, please do not hesitate to get in contact with us.