Investment market update: July 2022

Published: August 15, 2022 by Jennifer Armstrong

The ongoing war in Ukraine, rising interest rates and soaring inflation could be pushing some economies towards recession in the coming months.

This uncertainty has caused real volatility in global stock markets. Indeed, 2022 was the worst first half of the year for developed market equities in more than 50 years.

As an investor, you may be worried about the effect the current situation could have on your portfolio and long-term plans. However, it’s important to remember that investing is a long-term endeavour, and short-term volatility is something that is to be expected.

If your plans haven’t changed, it’s unlikely your financial plan will need to change either.

If you have any questions, please contact us.

UK

The war in Ukraine is significantly affecting fuel, energy, and food prices, which is continuing to place pressure on both households and businesses. With a further significant rise to the energy price cap coming in the autumn, millions of households are facing an unprecedented squeeze.

Inflation reached yet another 40-year high in the 12 months to July 2022. The rate of 10.1% is slightly higher than the 9.4% recorded the previous month.

Fears of a recession subsided slightly with the unexpected news that GDP in the UK grew by 0.5% in May 2022, after a decline of 0.2% in April.

However, although the UK economy is performing slightly stronger than the eurozone or the US, the latest monthly survey from the S&P Global/Chartered Institute of Procurement and Supply (CIPS) showed both the UK services and manufacturing sectors are struggling to cope with rising cost of living pressures.

The CBI’s latest ‘Industrial Trends’ survey found that output volumes and new orders in the three months to July both increased at the slowest pace since April 2021.

Political issues also created uncertainty in the UK, after Boris Johnson resigned as prime minister, kickstarting a Conservative leadership contest that will run until September 2022.

A series of strikes across the UK are also affecting business operations. Two days of further strike action on UK railways in July will be followed by further walkouts in August, while strikes involving Post Office workers, and airport staff have also caused disruption. Issues at border control have also caused significant delays to travellers heading to Europe through Britain’s ports.

Overall, the UK FTSE All-Share index fell by 5% in the three months to the end of June 2022.

Europe

Ongoing food, energy, and fuel supply issues exacerbated by the war in Ukraine also hit the eurozone economy in July.

In response, the European Central Bank (ECB) raised interest rates for the first time since 2011 to tackle eurozone inflation that has increased to 8.6%.

In a surprise move, the ECB raised its base rate by 0.5 percentage points, despite economists predicting a smaller 0.25-point rise.

The ECB’s president, Christine Lagarde, said: “We expect inflation to remain undesirably high for some time, owing to continued pressures from energy and food prices, and pipeline pressures in the pricing chain.”

Confidence in Europe’s leading economies is low, as soaring energy price and fears of a gas shortage drive down confidence.

Research institute IFO has reported that German business morale fell in July to the lowest level in over two years. IFO’s business climate index fell to 88.6, from June’s 92.2 – the worst reading since the first Covid-19 lockdown. It puts Europe’s largest economy on the threshold of recession.

European shares, as measured by the MSCI Europe ex-UK index, fell by 10% in the second quarter of 2022.

US

Separate Purchasing Manager’s Index (PMI) surveys have pointed to the US already being in recession.

America’s composite PMI fell from 52.3 to 47.5 in July, its lowest level in 26 months. The rate of decline in manufacturing and services was the steepest since the beginning of the Covid-19 pandemic, due to falling demand.

As in the UK, the US inflation rate soared to a 40-year high, reaching 9.1% in the year to June 2022.

Despite many pessimistic predictions, the US showed robust job growth in June, defying expectations of a slowdown and keeping the unemployment rate at just 3.6%. Meanwhile, retail spending, a key indicator of economic health, rose 1% in June – although some of that increase can be attributed to rising prices.

US shares have rebounded in July after a difficult few months. After falling into a bear market earlier this year, the S&P 500 index is currently up more than 8% from its 2022 low and, by the end of July, was trading at its highest level since early June.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.


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