As we enter the June, it is fair to say that 2022 hasn’t been a good year so far for investors. The word 'unprecedented' was used a lot when the pandemic first took effect in the Spring of 2020 - and for good reason. We saw the investment markets drop at a rate we hadn’t witnessed before, but almost as quickly we saw them begin to recover.
I had hoped that those times were behind us, but undoubtedly, we are once again seeing unprecedented markets, but for different reasons altogether. From the end of 2021 until now, there have many factors at play which have affected how your investments have performed; including concerns over the Omicron variant, rising energy prices, global inflationary pressures, Covid lockdowns in China, and of course, the war in Ukraine. Unfortunately, very few investment sectors have been in positive territory this year.
Here in the UK, energy costs are continuing to drive up inflation. In April, we saw inflation increase to a year-on-year figure of 9%, which was a significant jump from the already high 7% in March. This was mainly caused by the increase in the energy price cap which went up by 54%, meaning an average household will now be paying £1,971 per annum via direct debit. In a bid to help alleviate the impact of these higher bills, the Government introduced a package of measures worth £15 billion, which in part will be financed by a windfall tax on energy firms.
The US is also dealing with similarly high inflationary pressures, although their rate of consumer price inflation fell slightly in April as petrol prices eased. The rate in April was 8.3% falling from 8.5% in March. Much like in the UK, these are decade-high rates, and in the US these rates have not been seen in 40 years.
Highlighting how inflationary pressures are global, Europe’s rate of inflation rose sharply in May to an all-time high of 8.3%, as is the case here in the UK driven by the high energy prices. There are some countries in the Eurozone that are now seeing double-digit inflation, whereas in contrast, France has a relatively low rate of 5.8%. However, the European Central Bank (ECB) has indicated that they expect inflation to be on target in the Eurozone in the medium term.
With inflation being so high, the central banks around the world have been announcing a series of increases in key interest rates. Here in the UK, the Bank of England (BoE) raised the base rate by 25 basis points to 1%; a level that was last seen in 2009. The US Federal Reserve (Fed) also raised its rate to a range between 0.75% and 1%, which was an increase of 50 basis points. Both the BoE and Fed are expected to continue monetary tightening measures through 2022. The fear for investment markets is how will the increase in rates affect the economic growth in the coming months.
Elsewhere in the world
Europe is also expected to raise rates in 2022, India increased its key interest rate to 4.4% to curb inflationary pressures and Australia raised their rate to 0.35% which was its first increase in a decade.
Looking at the global investment markets for May, the FTSE 100 was largely unchanged increasing by 0.8%, whilst the FTSE 250 fell by 1.4%. The Dow Jones Industrial Average Index in the US ended the month in basically the same position as at the start. In Germany, The Dax Index rose by 2.1% and the Nikkei Index in Japan saw a 1.6% increase.
What does all this news mean for your investment portfolios?
Throughout 2022, rising inflation is proving a major issue for almost all the asset classes, whether it be equities, bonds or currencies. The hope last year was that the inflationary pressures were a temporary concern caused by Covid-19. It seems clear that these price spikes will last longer than was originally predicted.
In general, the equity markets have struggled so far this year, where the prospect of higher interest rates has undoubtedly hit returns. The UK market has fared slightly better with its skew towards the energy and financial sectors.
Normally, when the equity markets are in retreat, you would expect the fixed income sector to provide the cushion to some of these sell-offs. However, in this rare period of market stress, the asset classes have correlated. In other words, they are also facing negative returns, where the rising interest rates are having an impact.
As always, we advise that your portfolios are long-term investments and, as seen historically, we believe the performance will gradually return. Indeed, many studies have shown that it is time out of the investment markets that most impacts overall long-term return. This is because many of the best-performing days immediately follow a market downturn. If you are concerned about the current investment conditions, please do not hesitate to contact us, and we will be happy to talk in more detail.
Who should you contact for more information?
Director Richard Brazier
Financial Adviser Amanda Beacon
Senior Consultant Graham Smithson