August Investment Summary
Investors focus returned to the difficult backdrop of slowing economic growth, interest rate rises, elevated levels of inflation, and the ongoing war in Ukraine. The “risk-off” environment saw global equity markets erasing nearly half of the gains made in July. Bond markets continued to adjust for more hawkish moves by global central banks, resulting in fixed income markets (Europe and UK in particular) posting their worst monthly returns of the year so far. In the currency markets, the pound sterling had another horrible month sliding to 1.15 against the US dollar.
The problem for the central banks, and financial markets in general, is that inflation is running at levels last seen in the 1980s. Interest rates are still too low to have any impact on bringing inflation down towards the target rate of between 2% and 3%. Of the major central banks, the US Federal Reserve (Fed) has been the most aggressive, but even they have only pushed rates up to just over 2.25%. Fed Chair Powell was very explicit in a speech at the Kansas City Fed’s Jackson Hole conference that it was not yet the time to pause rate hikes. Neither equity nor bond markets took this news well. US ten-year yields are edging back up towards 3.5%. This has pushed mortgage rates up significantly and begun to noticeably slow the US housing market. A housing slowdown is often a precursor for a larger economic slowdown. Indeed, housing affordability in the US is now at 2006 levels.
Whilst inflation is a global problem, the Eurozone and the UK have greater challenges ahead than most. The sharp rise in energy prices, in particular natural gas, has impacted them more because of their reliance on Russian supplies – see Appendix 1. Both central banks face a tough task balancing the sharp rise in inflation and the reduction in economic activity in the face of these price shocks and the impact the direct impact this will have on businesses and household incomes.
Central banks are hesitant to hike rates too much in a slowing economy. But their currencies’ exchange rates are suffering as the Fed has been more aggressive. It is a mess. The European Central Bank has suggested that a 75-basis point hike may come in early September. Some members of the Bank of England’s Monetary Policy Committee have suggested they also need to “go big”! As I write, Liz Truss, the new UK Prime Minister, is advocating tax cuts and other spending measures to combat the energy shock. This won’t make things any easier for the Bank of England.
The recent move by Russia to turn off the Nord Stream 1 pipeline has set Europe up for a difficult winter. Talk of rationing energy and factory shutdowns have bounced around asset markets. None of the above is good for equity markets. This also puts further downward pressure on the exchange rate which puts further upward pressure on inflation. This is not a good place to be.
China isn’t helping the global economy either. The ongoing Covid-19 lockdowns continue to wreak havoc with global supply chains. The slowdown in real estate is also dampening consumer sentiment and demand. The only good thing about China’s slowing growth is that it isn’t putting any upward pressure on energy prices. Thank goodness for small favours.
Not losing is winning, so being conservative is not a bad thing. For the first time in many years (perhaps a decade?) cash offers a decent nominal return. Sure it doesn’t protect you from inflation, but declining equity markets haven’t protected you either. In the US, 6-month T bills pay nearly 3.5% and, in the UK, two-year gilts also pay over 3%. We may hold a bit more of these in the portfolios as we navigate through what is likely to be a challenging finish to the year.
This document was produced by Oakbridge Wealth (“Oakbridge”) for information purposes only and for the sole use of the recipient. Any information provided by a client ("Client Information") and used to produce this document will have been checked by Oakbridge for plausibility only and the client notified accordingly of any obvious anomalies. However, Oakbridge has not checked the Client Information in detail for completeness and accuracy and accepts no responsibili ty whatsoever in respect of the Client Information. The Client makes all investment decisions independently. Past performance, simulations and forecasts are not necessarily a reliable indication of future performance and the value of investments may fall as well as rise. The information contained in this document is only valid at the time this document is produced. A change in the economic environment, possible changes in the law and other events may cause future performance to deviate from that expressed or implied in this document. The information and analyses contained in this document have been gathered from sources that are generally considered to be reliable. However, Oakbridge makes no representation as to their accuracy or completeness in relation to the investment products described and does not accept liability for any direct or consequential losses arising from reliance on the information contained in this document. An Oakbridge Group company may, to the extent permitted by law, participate or invest in other financing transactions with the issuer of the investment products referred to herein, perform services or solicit business from such issuers, and/or have a position or effect transactions in the securities or derivatives thereof. Alternative investments, derivatives or structured products are complex instruments that typically involve a high degree of risk, and are intended for sale only to investors who are capable of understanding and assuming the risks involved. Investments in emerging markets are speculative and significantly more volatile than investments in traditional markets. Some of the main risks are of a political, economic, currency or market-related nature. Furthermore, investments in foreign currencies are subject to exchange rate fluctuations. Investments in the investment products described in this document should be made only after carefully studying and reviewing the product documentation. The opportunities and risks associated with each investment product can be found in the relevant underlying securities prospectus and any other supplementary documents. All documents will be made available at any time upon request. Oakbridge does not provide tax or legal advice and, before entering into any transaction, investors should independently consider the financial risks as well as the legal, tax, credit and accounting consequences of that transaction. The attached material is not the result of our/a financial analysis. Neither this document nor any copy may be further distributed to any party. In particular, it may not be sent, taken into or distributed in the United States or given to any US person. This restriction applies equally to other jurisdictions, unless such actions are performed in compliance with the applicable laws of such jurisdiction. This communication is confidential and intended solely for the person to whom it is delivered. No part of this communication may be reproduced in any form or by any means or re-distributed without the prior written consent of Oakbridge. This communication should not be construed as an offer to sell any investment or service. This communication does not constitute the solicitation of an offer to purchase or subscribe for any investment or service in any jurisdiction where, or from any person in respect of whom, such a solicitat ion of an offer is unlawful. If you are in doubt about the securities to which this communication relates, you should consult an independent financial adviser. The information in this communication has been prepared in good faith, however, no representation or warranty, expressed or implied, is or will be made and no responsibility or liability is or will be accepted by Oakbridge or its officers, employees or agents in relation to the accuracy, completeness or fitness for any purpose of this communication. The information stated, opinions expressed and estimates given are subject to change without prior notice.
The services described are provided by Oakbridge or by its subsidiaries and/or affiliates in accordance with appropriate local legislation and regulation. Certain products and services may not be available in all locations or to all Oakbridge clients.
Oakbridge is regulated in Jersey by the Jersey Financial Services Commission for the conduct of Investment Business.
Oakbridge is a limited company with company number 121454, incorporated in Jersey on 7 June 2016. Its business address is Weighbridge House, 2nd Floor, Liberation Square, St. Helier, Jersey, JE2 3NA.
Oakbridge is a registered business name of Oakbridge Limited.
Oakbridge forms part of the ED Group.