June Issue 2022
Summary
Global equity markets continue to be unsettled. To some, June’s modest rotation away from Energy stocks – until now this year’s winners – marks a turning point.
Equity Snapshot
| United States | • | US equities tumbled over June on fears that a recession would be needed to tame rampant inflation. The S&P 500 Index moved decisively into a bear market with all sectors suffering sizeable losses. The energy sector, a rare bright spot so far in 2022, led the market lower, suffering double-digit losses. While the stock market decline means valuations have become more attractive, attention is now turning to earnings with fears that rampant inflation and the prospect of a recession could lower margins. Growth stocks outpaced value stocks by a modest margin, helping the tech-heavy Nasdaq Composite to fare better than the broad-based S&P 500 Index over the month. |
| • | The Federal Reserve (Fed) raised interest rates by 75 basis points (bps), its first increase of that magnitude since 1994, and taking the federal funds rate to a range of 1.5%-1.75%. The Fed warned it would implement another substantial increase in July, with further increases expected throughout 2022 and 2023. The US central bank also started quantitative tightening, whereby it will no longer reinvest its holdings of maturing bonds back into the market. | |
| Europe | • | European equities fell sharply over June (in EUR terms) amid fears of a European recession. Worries over the supply of gas also increased, with the International Energy Agency warning that Europe must prepare for the complete severance of Russian gas exports this winter. Russia cut the flow of gas through the Nord Stream 1 pipeline by 60% during June: it has already suspended gas deliveries to the Netherlands, Denmark, Poland, Bulgaria, and Finland after they refused to pay in rubles. The reduction in supply comes as European countries try to build up their gas reserves ahead of the winter. |
| • | With inflationary pressures continuing to build, the European Central Bank (ECB) finally capitulated, signalling it would likely raise rates by 25 basis points (bps) in July. Hinting of more aggressive rate rises later in the year, the ECB suggested that borrowing costs would be above zero by the end of September for the first time in eight years. With the ECB also about to end its bond-buying programme, fears grew of the impact of higher rates on more heavily indebted euro-zone member states. At an unscheduled meeting, the ECB pledged to support weaker nations, including the introduction of a new “anti-fragmentation” instrument. | |
| Asia | • |
Equity markets in Asia were broadly down in June with the exception of China and Hong Kong. Onshore China equities were up by around 10% and offshore China equities also saw positive returns. Elsewhere, the rest of Asia suffered on the back of a deteriorating economic outlook. Taiwan and Korea were among the worst hit markets as investor sentiment soured on tech stocks globally due to fears of a global recession and a cautious outlook for the semiconductor sector. ASEAN markets also retreated over the month, given the selling pressure from global investors. |
| Bond | • | Global bonds closed a volatile month with losses. Initially, bonds sold off sharply as investors started to price in even higher interest rates. In the US, the yield on the 10-year Treasury bond briefly came within touching distance of 3.5%, its highest level in 11 years, but closed June around 3.0%, an increase of around 17 basis points (bps) over the month. In Europe, the 10-year German Bund yield ended June more than 20 bps higher at 1.34%. Japan was the exception, with the Bank of Japan forced to intervene to keep the 10-year JGB yield within its permitted band of +/- 25 bps around zero. |
| Outlook | • | Global equity markets continue to be unsettled. To some, June’s modest rotation away from Energy stocks – until now this year’s winners – marks a turning point. To others, the move is a false dawn, with more turmoil expected to follow. In both cases, the verdict rests upon investors’ views of inflation, the resulting course of monetary policy and ultimately, the likelihood of a recession. |
| • | Since January, global equity markets have taken the view that historic rates of inflation will push central banks into tightening monetary policy aggressively. That belief has existed alongside fairly robust economic indicators – low unemployment levels, high PMIs, and elevated levels of corporate earnings. This combination has allowed central banks to maintain a scenario in which higher interest rates deliver an economic “soft landing”. | |
| • | Economic data is now starting to show signs of weakness. Where companies are having to pay more for energy, raw materials, wages, and debt; employees are facing a cost-of-living crisis. This, in turn, has the effect of reducing demand and, ultimately, destroying growth. Macro optimists see this as the beginning of the bottom, with a downturn serving to accelerate the return of easy and equity-supportive monetary policy. Pessimists, meanwhile, see it simply as the beginning of a much heralded stagflationary environment. | |
| • | Taking a firm view either way requires a level of forecasting to which we do not aspire. This reflects the enormous potential for unpredictable events, not only to the downside (such as continuing high inflation) but also to the upside (e.g., a complete cessation of conflict in Ukraine). Instead, we continue to be guided by our search for companies with long-term profitability that should outperform in a range of market environments. | |
| • | In a market that is still highly emotional, share price reactions to any earnings numbers may provide further volatility. Yet, as the earnings multiples on all stocks have declined over the course of the year, valuations across the portfolio have become increasingly attractive. We are also seeing an increasing number of previously un-investable stocks (due to their elevated valuations) reach an attractive range. Judiciously increasing our positions in the former, while selectively buying the latter remains the key to ensuring portfolios are well-positioned for the future, whichever way the economic data falls. | |
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July Issue 2022
Summary
August is typically a month for holidays, as people make use of the last true summer weeks to prepare for autumn and winter.