Investment market update: October 2022

September saw continued turbulence in the global economy as inflation remained high. Read how this affected markets and what it could mean for you.

4 min read

Whilst the focus is predominantly on events from September, there may be reference to events and results from earlier months in the year which may be relevant or have impacted the September performance overall.


Q3 ended with another turbulent month on the global markets. The announcement of unfunded tax cuts in the UK by the now former chancellor Kwasi Kwarteng led to intense volatility, requiring intervention by the Bank of England (BoE) to calm the markets. High inflation persisted, leading to further interest rate rises across many economies in an attempt to control the prices of goods and services.


The energy crisis in Europe avoided a worst-case scenario as reserves were filled ahead of the upcoming winter, however gas prices in particular led the euro to plummet in value and divided opinions across the EU about how to support consumers. Here’s more detail about how the global markets performed in September and what this could mean for you.


UK


News from the UK this month was dominated by the government’s “mini-Budget” and the immediate aftermath. The announcement of significant tax cuts as well as extensive interventions in the energy markets funded by borrowing caused significant volatility in the markets, leading to a sharp fall in the value of the pound against the dollar to an all-time low of $1.0327. [1]


In response to this, the BoE stepped in to buy billions of pounds’ worth of British government bonds [2] after their value fell sharply [3] “to act as a backstop to restore orderly market conditions and reduce any risks from contagion to credit conditions for UK households and businesses”. [4]


The budget also drew criticism from the International Monetary Fund (IMF), who warned against “large and untargeted fiscal packages at this juncture” [5] due to the likelihood that it would heighten inequality in the UK.


After the reversal of the abolition of the 45p tax rate, the pound rallied, returning to slightly above the level seen before the mini-Budget, at around $1.13 [6]. Despite this reversal, interest rates are expected to rise dramatically over the coming quarters, and Schroders expect the base rate to rise from its current level of 2.25% to 5.25% in the middle of 2023 [7].
This is unwelcome news if you’re seeking a mortgage in the UK anytime soon. The BBC reports that the average rate on two-year fixed mortgage deals jumped to 5.75% on Monday 3 October, up from 4.74% on the day of the mini-Budget. [8]


Throughout the quarter, the UK stock market experienced a downturn amounting to 3.8% for the FTSE 100 [9]. Despite this, the final day of the quarter closed with some optimism. Reuters reported a 0.2% rise for the FTSE 100, and a 2.3% rise for the FTSE 250. [9]



US


Hopes of interest rate cuts from early in Q3 [10] were dashed in September as the Federal Reserve confirmed its commitment to controlling inflation and raised the federal funds rate by 0.75% [11] for the third time in a row, entering the 3% – 3.25% range. This led borrowing costs to rise to the highest rate since 2008 [11]. Commenting on the increase, and the prospect of further increases in the near future, Chair Powell announced “We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t.” [12]


Alongside this development, the US stock market continued to experience turbulence in September, with the S&P 500 closing the month at its lowest level this year, falling 9.3% in the month [13]. The Dow tumbled 8.8%, while the Nasdaq lost 10.5%. [13]


The housing market also appears to be slowing, as 30-year fixed mortgage rates rose to their highest level since 2007, well above 6% [14]. Despite this, housing sales actually increased in August, making it unlikely that housing will lead to a recession. [15]


However, the spectre of recession still looms. While things appeared more buoyant during the second quarter of the year and into July, with the US experiencing a 3.5% unemployment rate, which is one of the lowest since 1969 [16] – there are still warning signs that the US economy could be headed for a recession, or indeed may already technically be in one based on the fact that GDP fell by -1.6% in Q1 and -0.9% in Q2. [17]


Europe


The energy crisis in Europe continued in September as gas supplies via Nord Stream 1 pipeline were stopped by Russia in retaliation over the EU’s support of Ukraine.[18]
This pushed prices up causing the euro to drop to a 20-year low against the dollar of just 98.78 cents[19]. Opinions on how to approach the crisis and support consumers amid persistently high gas prices divided nations across the EU. [20]


Growth slowed in Europe during Q3, however inflation continued to rise, hitting 10% year on year in September. This has been driven by a combination of the aforementioned energy crisis and the cost of food, alcohol and tobacco, which has risen by 11.8% year on year. [21]


The European Central Bank is expected to implement aggressive interest rate hikes to combat inflation, potentially hitting 2% by the end of 2022. [14]


On the stock markets, share prices fell. The STOXX 600 index dropped by 6% through Q3 and a hefty 7.8% in September alone [22]. A recession is predicted in Europe as a result of the cost of living crisis and low consumer spending due to inflation [23]. Despite the predicted recession being the “most anticipated we’ve ever had, I don’t think it’s fully reflected in the markets” explained Guy Miller, chief market strategist at Zurich Insurance, [24] suggesting that we may see further downturns in the near future.


Asia


In Asia, the Chinese economy seemed to rally somewhat through the quarter, but still ended September in a fragile position as evidenced by weak credit demand [14]. The war in Ukraine and ongoing tensions between China and Taiwan fuelled bad sentiment throughout Q3. [10]
Covid lockdowns were another factor, as they negatively affected business in the retail, aviation, and hospitality sectors. [25]


However, the wider global economy also played a role in China’s slow economic growth throughout Q3, as soaring inflation and interest rates caused consumers to rein in their spending. China’s exports to the US fell by 3.8% in August from the previous year, while exports to the European Union showed 11.1% growth [26]. In spite of this, China’s factory activity increased during September for the first time in Q3. [27]


In South Korea, factory output was down in August for the second month in a row. However, Japan’s factory activity increased. [25]


In Japan, the yen gradually weakened against the US dollar during Q3 as a result of the widening gap in interest rates between the two countries [10]. While the Fed has aggressively raised interest rates to fight inflation, the Bank of Japan made no changes to their policy.



Focus on the long term to weather the current economic storm


With little improvement to the turbulence seen in the global markets across Q3, you might be concerned for the value of your investments, especially as a global recession starts to enter the realm of possibility.


At times like these, though, it’s important to remember that the timescale of your investment will normally be considerably longer than these periods of high uncertainty. While a recession may be on the horizon, it’s worth noting in time, economies and markets typically recover.

Alongside taking this long-term view, diversifying your assets across the global economy helps to mitigate the risk posed by each individual economy or sector.


Here at Succession, the key pillars of our investment philosophy are:
• The right asset allocation
• A long-term view
• Diversification
• A bespoke approach


This philosophy is what we use to help you protect and aim to grow your wealth despite the occasional headwinds the global economy faces.


Market volatility is no stranger to us, and we know that by following this philosophy and tuning out the sensationalist headlines that you might be seeing at the moment, you can feel confident about the future.



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

The content of this guide was accurate at the time of writing.


Sources:

[1] 26/09/2022 | Pound sank to record low against the dollar and UK economy predicted to flatline next year - as PM and chancellor defend mini-budget| Sky News
[2] 28/09/2022 | Bank of England to buy 65 billion pounds of UK bonds to stem rout | Reuters
[3] 28/09/2022 | Weakening pound: what does it mean for UK interest rates and UK assets? | Schroders
[4] 03/10/2022 | Gilt Market Operations – Market Notice 3 October 2022 | The Bank of England
[5] 28/09/2022 | IMF warns UK over mini-Budget tax cuts | FT Adviser
[6] 03/10/2022 | UK scraps tax cut for wealthy that sparked market turmoil | PBS
[7] 28/09/2022 | Weakening pound: what does it mean for UK interest rates and UK assets? | Schroders
[8] 03/10/2022 | Mortgage rates rise sharply as squeeze tightens | BBC
[9] 30/09/2022 | London stocks climb on the last day of tumultuous quarter | Reuters
[10] 05/10/2022 | Quarterly markets review - Q3 2022 | Schroders
[11] 06/10/2022 | United States Fed Funds Rate | Trading Economics
[12] 22/09/2022 | Jay Powell warns of interest rates pain as US recession risks rise | Financial Times
[13] 30/09/2022 | Dow tumbles 500 points on Friday to end September down nearly 9% | CNBC
[14] 03/10/2022 | Quarterly Market Review | JP Morgan
[15] 03/10/2022 | Weekly global economic update | Deloitte
[16] 05/08/2022 | Long-term unemployment tumbles to its pre-pandemic level, helping to ‘mitigate the risks of labor-market scarring’ | CNBC
[17] 21/09/2022 | Is The U.S. Headed For Another Recession? | Forbes Advisor
[18] 03/10/2022 | EU leaders to call for gas price cap to curb inflation -draft statement | Reuters
[19] 04/09/2022 | Euro, Stocks Tumble as Russia Pulls Rug on Gas Supplies | Bloomberg UK
[20] 22/09/2022 | EU considers more action to tame energy prices, fix liquidity squeeze | Reuters
[21] 30/09/2022 | Eurozone inflation reaches new record high of 10% in September | Euronews
[22] 30/09/2022 | European markets close higher to end bruising quarter; Stoxx 600 notches worst month since June | CNBC
[23] 05/09/2022 | Europe heading for recession as cost of living crisis deepens | Reuters.
[24] 08/09/2022 | European Markets Face New Reckoning Threatening More Losses | Bloomberg UK
[25] 30/09/2022 | China's factory, services surveys suggest economy struggling to rebound | Reuters
[26] 07/09/2022| China’s Economy Takes Hit From Global Slowdown as Exports Weaken | Bloomberg UK
[27] 02/10/2022 | China's factory activity increases in September, first time in three months | The Economic Times



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