Here is the latest market update from September 2022 from our Chartered Financial Planner – Adele Cowgill
The data of annual GDP growth projections for 2022 is showing an economic slowdown is underway with only 3 of the 24 country projections higher in June 2022 than the projection as at December 2021 (OECD Economic Outlook edition 2022/1). Although the US has seen two consecutive negative GDP growth figures this has not been declared as a recession yet, mainly due to the healthy labour market that has proved very resilient. However, in contrast job openings are reducing, evidence of a slow down in hiring plus wages are on a downward trend. The housing market is also slowing.
The above is causing consumer confidence to wane with concerns over inflation and fuel as interest rates rise. The Bank of England projection for interest rate in the UK are for it to potentially hit 3% by early 2023 before a very gradual reduction to 2.25% over the following 2 years.
The CPI topped 10% on the 12 months to July, the Office of Budget Responsibility continues to expect a peak in the fourth quarter of this year although this included anticipation of further fuel costs which the new Prime Minister Liz Truss has declared will be capped.
Although the above paints quite a gloomy picture, our Chartered Financial Planner Adele Cowgill thinks that there are some positives to be had.
Firstly bond yields.
There has been a highly unusual breakdown in the correlation between bonds and equities this year but the evidence shows that this should be relatively short term and much of the pain has already been priced in, making bonds much more attractive now for investors which is a brighter outlook than some 6 months back.
As for dividend outlook. There have been some amazing statistics.
In quarter 2 of this year dividends were up by 11.3% with 94% of companies either increased dividends or held them steady which is positive when compared to previous market turmoil when many suspend or drastically reduce them. Oil, financial and the auto sectors have been key drivers of the dividend growth. This shows that inflation has not eaten into company profits with much of the cost increases being passed onto consumers.
That said, equity performance continues to struggle, European reliance on Russian gas, China’s zero COVID policy and city lockdowns has resulted in the UK equity market coming out reasonably well. The strength of the US Dollar, predominantly because of the Federal Reserve reacting fast to increase interest rates, is seen as a safe haven in times of market stress making the US more attractive whilst the Euro, Sterling and Yen continue to fall.
In summary then.
Our Chartered Financial Planner thinks that interest rates are likely to continue to rise until early next year, although the announcement from the Monetary Policy Committee has been delayed for September until 22nd September in light of the period of national mourning. The expectation for inflation is that it will remain high. Whether a technical recession is declared remains to be seen.
Uncertainty will always be a factor when investing, this could be as a result of a geopolitical crisis, such as the war in Ukraine or political issues such as the race for Prime Minister in the UK. That said, the most prudent strategy is to remain invested even when experiencing volatility as changing the plan or withdrawing from investments only leads to compounding the losses and can result in losing out on upturn when it happens.