September was another month of market volatility, which continued the downward trend that we have seen all this year.
The UK market
Several of the major central banks continued to raise their interest rates to counter the rising inflationary pressures. The Bank of England (BoE) delayed their announcement in September due to the Queen’s passing, but when they met, in a widely expected move, they increased the key interest rate from 1.75% to 2.25%. This is now the highest rate we have seen in the UK since 2008 and the BoE have confirmed that it would implement further increases in the coming months.
Inflation in the UK dropped slightly to 9.9% in August, but this was still the highest in the G7 countries. The BoE now predicts that inflation will rise to 11%, which is lower than their previous expectation of 13% following the Government’s Energy Price Guarantee.
As I mentioned in my last review, the mini-budget announced by the then Chancellor, Kwasi Kwarteng, was received badly by the international markets. This saw sterling fall to a 37-year low against the dollar, a sharp selloff of gilts and the FTSE 100 tumbling. During September the FTSE 100 was down by 5.4%, while the FTSE 250 fell by 9.9%. Since the start of the year, the FTSE 100 has dropped by 6.6% and the FTSE 250 by 26.9%.
It is now anticipated that the BoE will have to raise rates higher than previously expected. Although the BoE did not immediately raise rates after the mini budget, it indicated it “will not hesitate” to increase rates as and when is needed to bring inflation back to its 2% target. However, the BoE did take emergency action to support the gilts market, when it announced a £65bn bond-buying programme. The intention was to restore orderly market conditions, where there was concern about a material risk to UK financial stability.
Across the pond
The US Federal Reserve (Fed) raised its rates by a further 0.75% for the third time in a row, putting their rates in the range of 3% to 3.25%, which added pressure to US equities and bonds. During the month the Dow Jones Industrial Average Index was down by 8.8%.
Much like the UK, the Fed has confirmed its commitment to getting inflation under control. The Chairman of the Fed, Jay Powell, warned that interest rates would be maintained at a level to restrain economic growth ‘for some time’ and that this would hurt growth and employment levels. Data showed that in August US consumer inflation was 8.3%, which was down from 8.5% in July, but higher than the expected 8.1%.
European markets
Over in Europe, the European Central Bank (ECB) unanimously voted to raise interest rates from zero to 0.75%, its highest level since 2011. The Eurozone’s rate of inflation rose to 9.1% in August from 8.9% in July. They now expect to hit double figures when the September figures are released. The ECB have indicated there will be more increases to come, but there will probably be less than five. To date, the ECB has been lagging behind the major central banks in hiking their interest rates to combat rising inflation.
The ECB does not expect a recession in the Eurozone and raised its expectation of economic growth to 3.1% for this year, but did cut its expectations for next year to 0.9% and 2024 to 1.9%. These predictions contrasted with those of several think-tanks that warned the soaring energy prices would cause an economic decline in Germany in 2023. The ECB will begin negotiations in October to start reducing its EUR 5 trillion bond portfolio amassed over the last seven years on its balance sheet, which would likely increase borrowing costs, putting additional pressure on the budgets of southern European member countries. During September, the German Dax Index fell by 5.6%.
Japan
One central bank that has bucked the trend for increasing interest rates is the Bank of Japan (BoJ). Their continued loose monetary policy has resulted with the yen being undermined, especially with the stronger dollar. The BoJ was forced to intervene in markets for the first time since the late 1990s to shore up the yen after the Fed’s rate hike. Over September, the Nikkei 225 Index (a stock market index for the Tokyo Stock Exchange) fell by 7.7%.
You and your investments
The market reviews clearly illustrate that these are very challenging times to have monies invested, wherever in the world they may be. Sadly, there is very little positive news out there. We always advise that your investments can go down as well as up, but we appreciate that can be of little comfort with the current economic environment. As always, our advice in these times is not to panic. Although, when I look at my own investments, I appreciate this can be easier said than done.
In these uncertain times I try to remember that I am investing for the longer term and think about the bigger picture. With all the current market volatility, I know the best antidote to this is to spread the risk across a broadly diversified investment portfolio that I hope can reap rewards from multiple sources, with a long-term investment horizon. There is a lot of media attention on the current climate and these headlines can be very concerning. However, sometimes they aren’t necessarily relevant to your actual investment circumstances and I would suggest that it is best not to be led by the headlines alone.
By remembering that your investment is for the longer term, you may feel more able to wait for this economic storm to pass. However, always remember that we are here to provide reassurance where we can and any guidance that you may need. Please do reach out to us, should you have any questions at all on the current economic climate, or more specifically on your investment.
As ever, if you have any concerns regarding your investments, please do not hesitate to contact us by calling +44 (0) 29 2067 5204/ +44 (0) 7917 390 344 or emailing me at richard.brazier@hanoverfm.co.uk and we will be happy to talk to you.