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5th August 2022
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Market update

July offers some respite

After a rather dismal start to the year, risk assets enjoyed a stronger July, with developed market equities and bonds both enjoying stronger returns:


As we have discussed before, our aim of being diversified across style of investing (value vs growth) and size of company has been a material headwind this year. However, through the more “risk on” environment in July, medium sized companies also have outperformed larger ones:


A new bull market?

This near-term bounce in markets and apparent improvement in sentiment begs the question of whether the bear market is over, and we are in the foothills of a new bull phase, or is this just a bear market rally.

Whilst stronger markets in July are welcome, we view this with a degree of scepticism for now. The market appears to be betting on inflation numbers beginning to subside, the US economy avoiding a recession and the US Federal Reserve (Fed) being able to cut interest rates early next year.

Focussing on the US, various indicators are pointing toward a recession and, according to the European definition of two consecutive quarters of negative GDP growth, the US is already in one. However, the US definition is less formulaic and so the jury is still out as to whether the US will enter a recession or not.

For now, the market narrative is that inflation is peaking and that the stronger dollar and falling equity markets have already tightened financial conditions enough for inflation to continue to fall. This is supported by the fact that energy prices have fallen from their peak and there are some signs that food prices are also stabilising. Given deteriorating consumer confidence, lower manufacturing orders and a slowing housing market, this will all enable to the Fed to start cutting interest rates in 2023:


The chart shows market expectations for the path of interest rates in the light green line versus the Fed’s own expectations in brown.

For now, and the situation is highly fluid, we are erring on the side of the Fed and believe it is unlikely they will cut rates next year. Core inflation measures are still rising, and wages are rising at roughly 7% according to the Atlanta Fed wage tracker:


Therefore, we see a risk that inflation is stickier than the market expects as higher wages embolden consumers to spend and companies to pass through higher prices, resulting in yet higher inflation.

There is also an argument to suggest that the Fed will not want to repeat its past mistakes of the 1970s which resulted in runaway inflation and low growth. Some argue that the Fed has been too slow to raise rates in the face of inflation during this cycle and they will want to be seen to be aggressive. Fed Chairman Jerome Powell recently reiterated that combating inflation is the Fed’s number one priority, suggesting that they are willing to tolerate a mild recession to achieve their goals.

What about Europe?

Unfortunately, the situation in Europe looks much worse than in the US and it is probable that Europe is already in recession. The situation will be exacerbated if Russia further squeezes natural gas supplies in retaliation for European sanctions. The European natural gas price has already risen 933% since the start of the year:


Bearing all this in mind, we think (guess) that there might be further downside from equities and have a reasonably cautious view on the outlook. However, we do think that some areas of the bond market are particularly attractive at the moment, especially if we do see a developed market recession.

The table below shows the potential return from a 10-year government bond at various target base interest rates. If we focus on the UK government bond (Gilt) in the right-hand column, we can see that, in the event of a severe UK recession during which the Bank of England (BOE) cuts interest rates to zero, the potential return would be in the region of 21%, as denoted by the circle:


We think this is valuable portfolio protection and highlights the importance of proper portfolio diversification (yes, that old chestnut again!). Of course, the BOE has been raising rates but has also openly admitted that the risk of recession in the UK is high. Therefore, whilst bonds have fallen in line with equities in the first half of the year, we think that the risk of being out of bonds is higher than the risk of holding them, given the highly uncertain economic outlook.

As always, your financial adviser or investment manager is on hand to answer any questions you may have about your portfolio or current market conditions.

Until next time stay well.


Our Financial Advisers are available on the phone so please contact us if you have any questions.

Important information

Past performance is not a guide to future performance and may not be repeated. Investment involves risk.

The value of investments and the income from them may go down as well as up and investors may not get back any of the amount originally invested. Because of this, an investor is not certain to make a profit on an investment and may lose money. Exchange rate changes may cause the value of overseas investments to rise or fall.

This communication/presentation is for information purposes only. Nothing in this communication constitutes financial, professional, or investment advice or a personal recommendation. This communication should not be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the document. Any opinions expressed in this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or companies within the same group as Ascot Lloyd as a result of using different assumptions and criteria.

This communication is issued by Capital Professional Limited, trading as Ascot Lloyd. Ground Floor Reading Bridge House, George Street, Reading, England, RG1 8LS. Capital Professional Limited is registered in England and Wales (number 07584487) and is authorised and regulated by the Financial Conduct Authority (FRN: 578614).