Inflation Centre Stage As Tory Leadership Contenders Reduced To Two

Market Update 22nd July 2022

Over the past week inflation continued to dominate the news as the European Central Bank increased interest rates for the first time in 11 years and CPI in the UK rose again to over 9%. Both exceeded expectations but neither generated a significant reaction. Other data out this week is more interesting.

Current employment vacancies are at a record high of 1.3 million but there are signs that some of the people who left the labour market are at last returning, and wage growth remains below inflation. The lack of wage inflation means the Bank of England has some leeway at its next interest rate meeting to not hike interest rates, but they tend to follow the Fed to a lesser or greater degree no matter what the situation.

In the UK the battle to become the next Prime Minister heads into its final stage. The next five weeks will see former Chancellor Rishi Sunak fight it out with Foreign Secretary Liz Truss. Rishi must be hoping everyone forgets he was one of the first cabinet members to stick the knife in Boris Johnson, and is responsible for the highest rates of tax for the last 70 years. Meanwhile, Liz Truss is trying to gain ground with Tory party members by criticising the current management of the economy and promoting a reversal of the rise in National Insurance and Corporation Tax in a bid to ease the cost of living crisis and stimulate growth in the economy. I think you can guess who would get my vote!

The Support for our Strategy that these markets, in these volatile times, require active investment management using common sense, not ‘follow-the herd (benchmark) passive investing’ where significant, virtually static weightings to these indices are retained no matter what the news flow and how the markets are performing. 

As detailed in our last newsletter, the FTSE 100 since launch on 3^rd January 1984 at 1,000 made +595% in it’s first 16 years to 30^th December 1999. Since that time in the subsequent 22.5 years, the FTSE 100 made just 3.68% over that 22.5 year period at just 1/7^th of 1% per annum average notwithstanding dividend income.

• Major Equity Markets – their losses since March 2022 and since the beginning of January 2022 respectively to the end of June 2022, during which time we had de-risked to just 9% across all of these markets by March and then to zero from March 2022 until July 2022:

• Major Equity Markets – their gains since we invested up to 49% (for growth-risk investors) across these markets since the beginning of July 2022:

• We are closely monitoring these indices trading ranges and as agreed with our clients we will be taking short term profits as we go, and then reinvesting as the markets pull back to cheaper levels, as successfully identified and actioned since the beginning of 2022 detailed above.

GLOBAL: PROFITS WARNING AS SALES FALL

This week brought profit warnings from Deliveroo, Made.com and pub-group Mitchells & Butler as they feel the effect of rising costs and deteriorating economic outlook. Last week saw Wetherspoons and soft drink-maker Fever-Tree also downgrade their forecasts. One contributory factor is the squeeze on disposable incomes as Made.com warned of a decline in big ticket spending as consumers become more pessimistic. After inflation regular earnings fell by a record 2.9% between March and May. IF you’re in need of guidance with stocks and shares, visit our stockbroking page for more information on how we can help.

Profit warnings have not been restricted to sectors dependent on consumer spending. Direct Line reduced its forecast while insurer Sabre issued a similar warning earlier this month. The UK has seen fewer profit warnings than the US and Europe this year and the number of downward revisions appears in line with the pre-Covid average. This could be due to UK companies starting with a more pessimistic outlook or the FTSE weighing heavily towards energy and mining companies, which have been benefiting from high commodity prices.

EUROPE: ECB RAISES INTEREST RATES TO A 20 YEAR HIGH

Following the euro hitting parity with the dollar last week, the European Central Bank increased interest rates for the first time in 11 years as it steps up efforts to tackle inflation. The 0.5% increase was bigger than expected, but the ECB said it believed a larger increase was necessary as inflation is still rising quickly. CPI inflation for the Eurozone hit a record 8.6% in June and energy costs account for almost half of the increase. Last week the euro fell to parity with the dollar but the larger hike has helped the euro rise to $1.02.

The ECB also said it was able to raise rates faster than expected as it has agreed details of its new bond-buying programme. This scheme is designed to prevent a sell-off in the debt of countries like Italy and Greece which is more vulnerable to rising interest rates. The ECB’s task could be made harder after Italy’s prime minister Mario Draghi’s resigned after losing a confidence vote. The ECB’s decision caused the yield on German 10-year government bonds to rise 0.1% but the yield on Italian government bonds increased 0.24% to 3.6%.

   UK: INFLATION SHOWS SIGNS OF NARROWING

UK Inflation rose again in June as CPI hit 9.4%. The increase is mainly being driven by the sharp rise in household energy bills and petrol and diesel prices. Core inflation (excluding food and energy costs) fell slightly for the second month in a row. The Bank of England has responded to rising inflation by floating the possibility of a larger-than-expected 0.5% hike in August.

Rising inflation is driving up the cost of servicing UK government debt. The monthly interest bill hit £19.4bn in June, almost double the £10.1bn cost in June 2021. This surge in cost may play a part in the race to become the next prime minister. Former chancellor Rishi Sunak led the MPs’ vote and favours higher taxes to deal with some of the costs of Covid but he currently trails Liz Truss in polls of Conservative party members. Truss is strongly in favour of tax reversals and cuts to ease the cost of living crisis and a Truss victory has been tipped to push down the value of sterling which could help stimulate exports.

Please note that nothing written here by the author should be construed as giving advice, it merely outlines our thinking.  Any advice will be discussed and proposed on an individual basis with each client when any advice that is given should be fully discussed with us before proceeding with any proposals made.

If you enjoy reading this weekly update, please feel free to share it with your friends and / or family who may also find the contents of interest, and do not hesitate to contact us if you need any help, information or advice yourself about any of the areas covered this week. 

Yours sincerely,

Philip A. Simmonds MBA, LL.B(Hons), FPFS, Chartered MCSI

Chartered Wealth Manager | Chartered Financial Planner

Solicitor (company in-house solicitor)

Chief Investment Officer | Head of Strategy

E : phil.simmonds@private-office.co.uk

      phil.simmonds@private-office.law (for legal matters)