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Icy weather and plunging temperatures have swept across Europe this week. The fall in temperatures has been mirrored in equity markets, which have witnessed a modest pullback following a very strong start to the year.

Despite the cold snap of weather, European natural gas looks set to record its longest weekly run of falling prices since the beginning of 2020. With elevated storage levels of natural gas and an expectation of warmer weather returning, gas prices have continued to decline. This should be good news for most businesses and consumers. We have seen a resurgence in European equities of late as the worst-case scenario of the area running of out gas now looks increasingly unlikely. We have witnessed a similar story in the UK – lower gas and petrol prices are a boost to the consumer, and while the outlook is still not particularly rosy, the slightly improved conditions have led to a sharp rebound in UK consumer stocks.

UK inflation data this week showed a slight easing in inflation which came in at 10.5%, down from 10.7% in November. Some of the biggest drivers of inflation were food and drink prices, which rose at their fastest rate since 1977. The high levels of inflation mean a further 0.5% interest rate rise is likely at the next Bank of England (BoE) meeting, taking the headline rate to 4%.

UK retail sales data was slightly disappointing, showing an unexpected 1% fall in December from the previous month, indication that consumers are reigning in spending on the back of high inflation and an uncertain economic outlook. We witnessed similar poor retail sales data from the US last week, showing this is a global issue as opposed to UK centric.

The trend of disappointing data this week was further evident with the New York state factory index significantly dropping, pointing towards weakness in factory activity at a national level. While the weak data was bad news for equity markets, we have seen bond markets continue their strong start to the year. Concerns around the global economy have led to falling yields (rising prices) for developed market government bonds. This has been driven by the view that the US Fed will now only raise interest rates by 0.25% at the next meeting as opposed to 0.5%, while the end of the overall hiking cycle appears to be approaching.

The gold price held firm this week, reaching eight-month highs. The rally in January looks to be driven by a combination of a weaker US dollar, elevated inflation, and declining US real yields. The declining US dollar and moderation in bond yields has also benefitted emerging market equities, coupled with the faster than anticipated reopening of China.

The slight pullback in markets this week should not detract from what has been a positive start to 2023. The leaders within the portfolios this year have included some of the alternative asset classes, including gold and infrastructure. It highlights to us the importance of being well diversified when constructing portfolios and looking beyond simply allocating to equities and bonds.

Andy Triggs, Head of Investments

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The strong start to the year continued into this week with both equities and bonds rallying. Well received US inflation data, coupled with stronger than expected UK GDP data has supported the thesis that inflation will continue to fall, and central bank policy will become more accommodative, while the positive economic growth coming from the UK offers some hope that any recession or slowdown will only be mild.

UK GDP data was released this morning, coming in above forecasts of -0.2% at 0.1% (month-on-month for November). Year-on-year for November was also 0.2%, confirming modest growth and reducing the chance that the UK has already dipped into recession. The men’s football World Cup had a significant part to play in the positive growth exhibited by the UK as pubs and bars were flooded, boosting the economy. While growth is positive, UK core inflation still remains high at 6.3%. UK Chancellor Mr Hunt believes their plan is working with the promise made to “halve inflation this year so we can get the economy growing again”.

US inflation was the most anticipated data release this week. Inflation came in at 6.5% (year-on-year) for December, lower than the previous figure of 7.1%. This is the sixth consecutive month of lower inflation data. On a month-on month basis for December inflation came in at -0.1%.  The inflation data has led the market to now price in only a 0.25% increase of interest rates at the next US Fed meeting, as opposed to the 0.5% rise that was previously expected. It appears that the aggressive interest rate hikes in 2022 are now feeding through into the inflation data releases. We are also seeing supply chain pressures ease, further supported by the reopening of China.

Germany appears to have significant labour shortages, and more than half of Germany’s companies are struggling to fill vacancies. The biggest reason is seemingly due to a lack of skilled workers with almost two million vacancies unfilled, this is estimated to be nearly Є100 billion of output foregone. The skilled worker shortage appears to be within the mechanical and electrical engineering sector. The planned energy transition and infrastructure build out within the country could be delayed due to these labour shortages.

Volkswagen (VW) reported its lowest sales last year for over a decade as China Covid lockdowns and the Russia / Ukraine war halted supply chains.  The German group, whose brands range from VW to Audi and Bentley delivered 8.3 million vehicles to customers last year. However, chip shortage issues have led to a very high order backlog with hopes that China’s reopening will lead to a production increase.

At the start of each year there are many economic commentators predicting what might occur in the year ahead. While we think making bold predictions is a dangerous game, we were struck by a comment in Havelock’s latest commentary as it aligns with many of our own philosophies and beliefs (their global equity fund is in portfolios) – “We will strive to remain humble and move forward wanting, as always, to own a portfolio that will be robust in a range of future economic scenarios.”

Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The Month In Markets – December 2022

Investors hoping for a Santa Rally this December were left disappointed. However, after a strong October and November global equities did still post a positive final quarter. The year in itself will be remembered as an extremely challenging period, with weakness in both equities AND bond markets.

The Santa Rally – the so-called phenomenon of equity markets performing well in December does actually have some supporting evidence. Analysis of monthly returns dating back to 1926 (for US stocks) showed that the month of December had the highest probability of producing positive returns. For those interested, September was the month with the lowest probability of positive returns (although this was still above 50%).

As the chart above shows, equity markets across the globe trended downwards in December, with the US market being the worst performer. Unpacking what happened, it seemed the US Fed were once again the main drivers of markets.

US inflation data, which was released mid-month, carried on the very recent trend of slowing at a faster pace than the market anticipated. US CPI for November (released in December) showed year-on-year inflation at 7.1%, lower than the expected 7.3% and the previous reading of 7.7%. A month earlier, US equity markets rose around 5% in one day on similar inflation data, however, this month there was no equivalent response. Coupled with lower inflation was a reduction in the size of interest rate hikes from the US Fed, who raised rates by 0.5%, as opposed to the recent 0.75% hikes. It’s fair to say that many investors would have expected lower inflation and smaller interest rate hikes to be positive for equities. However, it was US Fed Chair Powell’s speech that spooked markets and poured cold water on the Santa Rally. He stated that he did not believe that policy was yet restrictive enough (therefore meaning further interest rate hikes would occur) and that the central bank would need to be very confident that inflation was on the right path before considering any interest rate cuts. Importantly, the projections from the US Fed for where policy will be in 2023 showed they didn’t expect to cut interest rates this year. For investors who had positioned for a ‘Fed Pivot’ this hawkish language was bad news and we witnessed both bonds and equities sell-off.

Moving to China, we saw the country begin to ease controls and strict lockdown measures at the start of the month. Officially, the Chinese leadership team stated that the Covid-19 variants were becoming weaker and therefore it was safe to remove certain restrictions. However, after recent widespread protests there is a view that Xi Jinping was forced to change his stance given the level of these civil uprisings. While China re-opening should be good for economic growth, there are lingering concerns that a spike in cases could lead to further COVID variants and pose a global risk once more. Leaked reports from the country showed that they estimated 250 million people had caught COVID in the first 20 days of December. Many countries including the US have since implemented a China covid rule, ensuring travelers undertake mandatory testing before arrival.

There were interesting moves in the energy markets in December. The crude oil price dipped below $75 a barrel and was lower than it was during the start of the year (before Russia invaded Ukraine). The regular drivers amongst the readers will have noticed falling prices at the pumps – the writer can now find unleaded petrol below £1.40 a litre! The falling petrol prices should help the consumer, while it will also act as a deflationary force in upcoming inflationary data this quarter. European natural gas prices were extremely volatile during the month. With a cold snap initially sweeping across Europe we saw a spike in natural gas prices as consumption picked up and concerns mounted regarding suitable storage levels. However, the cold snap was immediately followed by a period of much more mild weather throughout Europe, and this led to a sharp reversal in natural gas prices. So far it seems the concerns of Europe running out of gas have been overdone and storage levels are at seasonal highs currently (88% full). Lower energy prices across Europe will have a positive impact on both consumers and businesses as we head into 2023.

As we look ahead into 2023 and beyond there is early evidence of inflation peaking and indeed beginning to trend down and this is likely to be a positive for asset prices. We believe it is unlikely that interest rate policy across most developed markets will be as aggressive in 2023 as it was this year, with the inflation shock now largely behind us and heavily priced in to assets. That being said, interest rates, at current levels will still pose headwinds for consumers and the housing market and as such we have held off increasing risk in portfolios, despite a better inflation outlook and much lower asset valuations. While diversification was hard to come by in 2022, with equities and bonds both falling, we believe correlations will begin to normalise going forward, however it is also important to hold additional asset classes for diversification, such as gold and infrastructure.

Appendix

5-year performance chart

Risk warning: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future results. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.

Andy Triggs

Head of Investments, Raymond James, Barbican

Our latest Investment Strategy Quarterly discusses the potential opportunities and challenges the new year may bring. With features broadly assessing the outlook for 2023, from an analysis of global developed markets to a search for context and opportunities against the backdrop of an economic slowdown. Read all this and more in Investment Strategy Quarterly: 2023 Outlook.

We would like to start this weekly note by wishing everyone a happy New Year. This has certainly been a busy first week back in markets with various data releases.

UK Prime Minister Rishi Sunak delivered his first speech of 2023 where he outlined five key targets for 2023. These include halving inflation, growing the economy, reducing debt, cutting NHS waiting times and stopping migrant boats crossing the border. The speech was described as “high on ambition but low in detail” with Mr Sunak making a bold demand that the public judge his premiership on the results achieved. Currently the opposition Labour Party hold a strong lead in the polls to win next year’s election, however Sunak will be hoping to rebuild trust in the Conservative Party.

In December we saw the US Fed slow down its aggressive rate hike trend and this led to a slower 50bps rise. The meeting minutes from December’s meeting were released on Wednesday. The key points were that policymakers are still focused on taming inflation that threatens to run hotter than anticipated and wanted to eliminate any “misperception” that their commitment to fighting inflation was wavering. The next phase for the Fed is to balance its fight against rising prices with the risk of slowing down the global economy too much. Their next meeting is scheduled for 31^st January, where another 0.5% rise is expected.

This afternoon we have seen non-farm payrolls for December come in hot as the US economy continued its strong run of job growth, adding 223k jobs. Unemployment is also down to 3.5%, beating the forecasted 3.7%. Government data showed there were 10.45 million job openings at the end of November, this translated to around 1.74 jobs for each unemployed person. This comes as a surprise to the market as major tech companies such as Twitter, Salesforce and more recently Amazon continue to cut thousands of workers after “over-hiring” during the 2020 pandemic.

On brighter news in Germany, inflation eased in December for a second consecutive month. Households received a one-off payment in December to cover energy prices and this had a downward effect on prices. Core inflation (excludes food and energy costs) still remains high, and this has created doubts in economists minds that a continued slowdown is not a given. President Nagel of the Bundesbank predicted that inflation levels would drop to 7% over 2023 before declining significantly in 2024.

Inflation in France also dropped in December, falling to 6.7%, down from a record high a month earlier. This is another sign that a mild winter and slowing energy prices are aiding Europe to overcome the inflation crisis. France has managed to keep inflation lower than other European countries due to government limits on regulated gas and power prices.

Falling inflation data in Europe helped propel European equities. After a strong final quarter of 2022, the unloved equity market has had a strong start in 2023, with the Euro Stoxx index rising close to 3% this week. UK equities have also had a strong start to the year, with both the FTSE 100 and more domestically focused FTSE 250 rising. The US market has been the outlier this week, with the headline index struggling, being dragged down by large falls in stocks such as Tesla, which fell nearly 14% on Tuesday, after declining 65% in 2022.

It was a mixed start to 2023 for commodity markets, with gold nudging higher while oil continued its general downtrend of recent months. Crude oil is currently trading around $73 a barrel, $5 lower than 12 months ago and considerably lower than recent highs of $120 a barrel in March 2022. This weakness in oil is likely to feed into the upcoming inflation data releases and should further support the view that inflation (in the US at least) has now peaked and will fall this year.

As we look forward to this year, a fund manager reminded us to “never waste a good crisis”. 2022 was a tough year across most asset classes and regions however this has created opportunities and with strong portfolio diversification and active management we believe that the outlook is positive for long term investors.

Andrew Triggs, Head of Investments & Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

Financial markets continued their revival from the early summer lows through November as investors’ perceptions regarding the risks prevalent throughout 2022 diminished somewhat. That those risks had not disappeared completely was evidenced by violent protests breaking out across China at the end of the month in response to the new Chinese government’s apparent desire to persist with its aggressive “zero Covid” policy.

Even those with the longest careers in the financial markets are struggling to remember a year quite as tumultuous as 2022 has proved to be. Military conflict in Ukraine and sabre-rattling over Taiwan have made headline news all year and served to intensify volatility across all international financial markets.

Are you ready for some football? Not American football, but global football—otherwise known as soccer! For the five billion spectators awaiting the start of the 2022 World Cup in Qatar this November, the sport is the epitome of speed and agility. But for the players on the 32 participating teams, it is so much more. The deceptively simple-seeming game requires years of training. It goes beyond the fundamentals of ball control to pitch awareness, anticipation, and making the right decisions under duress quickly.

What the Chancellor, Kwasi Kwarteng, presented to the House of Commons on Friday was definitively not a Budget; it was ‘The Growth Plan’. The sixth chancellor since 2016 was careful to avoid the B word, despite the huge sums of spending and borrowing that he announced – greater than in most, if not any, real Budgets, let alone mini-Budgets. When the Autumn Budget proper emerges – probably in November or December it is most unlikely to contain anywhere near such a wide range of radical and costly measures as were announced on 23 September.