Week ending 13th May 2022.

The end of the week brought Friday 13^th – unlucky for some, but for many key markets it was a day of recovering early week losses.

The S&P 500 just held off hitting the definition of a bear market – a 20% drop from the all-time high value. On Thursday, the US index was within a hair’s breadth of this, before coming to its senses and making a recovery.

On Wednesday, US inflation was released for April and came in at 8.3% year-on-year (0.2% lower than prior), reaffirming our belief that price pressures are plateauing and beginning to stem. It must also be remembered that a large proportion of inflationary pressures were driven by food and energy price pressures, pressures which will likely be alleviated as the year goes on as Russian and Ukrainian agriculture and energy supplies redistribute and COVID-19-driven supply chains further ease.

As we said in last week’s update, in a bid to counter inflation, the Federal Reserve raised interest rates by 0.5%. One must remember that as inflation is a backwards looking measure, the increase in rates isn’t yet reflected in the inflation reading, as the 0.5% increase was essentially implemented after the fact. One must also remember a 0.5% move was a standard level shift in the pre-financial crisis in 2008/9 rates, so the current increase is merely a standard level increase, no more, no less.

We believe that interest rates are likely to continue to increase gradually with central banks enacting an increase and then watching to see what happens. Why is this? Well, imagine the economy is walking on a tightrope with a strong wind coming from the East – this strong wind represents inflationary pressures. You know that at some point the winds will change and the economy will face some deflationary pressures (supply chains easing etc.) – or wind from the West. If interest rate increases are the equivalent of leaning into the wind to keep your balance, then too many increases too soon would likely spell disaster for the economy when the winds change. If you’ve managed to stick with us through that analogy then you’ll understand our thoughts on why interest rate increases will need to be slow, measured and gradual as central banks will not want to risk a policy-driven recession.

In the UK, a GDP data release revealed that the economy shrank by 0.1% in March from the month before as consumer spending drops and inflation pinches. However, the UK economy has a low correlation to our UK equity investments in the FTSE 100, as around 70% of the revenue generated from the FTSE 100 comes from outside of the UK. Furthermore, the UK looks attractive for medium-long term investment with many of the corporates listed in the UK being in good health.

Whilst lockdowns remain in China, on Friday the People’s Bank of China set their reference rate for the yuan vs the dollar at 6.7898, beating expectations. This is one of many monetary policy levers that China has to (and are willing to) use to boost markets. Additionally, the government have been pumping money into the market. With a supportive central bank, China provides attractive opportunity sets for investment ahead of the release of pent up demand from the world’s largest population as cities come out of lockdown.

In terms of data next week, we have average earnings and employment data in the UK, EU and Japanese GDP, UK and US retail sales and UK and Eurozone CPI.

Investment Management Team