Investments | 15 December 2022
Monthly update: Some positive market performance as tough year draws to a close
Markets have rallied since November after US inflation fell and we saw smaller interest rate rises on both sides of the Atlantic.
WHAT’S HAPPENING IN FINANCIAL MARKETS?
Stock and bond markets have rallied since November. Firstly, US annual inflation started to fall. Then, both the US Federal Reserve and UK’s Bank of England raised interest rates by less than they had previously. Investors hope this could signal a slower pace of rate rises to come, and perhaps even a peak in US rates in the first quarter of next year.
In terms of specific areas, semiconductors, industrials and emerging markets were among the best performers. Bond markets also saw gains, with US Treasuries and corporate bond yields falling (prices increased).
Sven Balzer, Head of Investment Strategy, Coutts, said, “The next employment and inflation announcements in the US will be watched closely to see if they affirm the recent improvement in bond performance. Notably, the Fed remains cautious – pushing back on suggestions that they’d reverse rate hikes quickly. A slower, steadier approach currently seems more likely.”
He added, “While we remain cautious for now, we expect next year will progressively provide a more supportive backdrop for markets as rate hikes end and potential rate cuts begin.”
When investing, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can fall as well as rise, and you may not get back what you put in. You should continue to hold cash for your short-term needs.
WHAT DOES THIS MEAN FOR YOUR INVESTMENTS?
The recent recovery has been broad based. On the bond side, government bond investments benefited from falling yields (prices rose) while credit markets benefited from the improved attitude toward risk among investors.
Meanwhile, the new UK budget provided welcome relief for UK assets and sterling rebounded, while the US dollar weakened against most currencies.
While markets rallied following China’s relaxation of Covid measures, it remains to be seen how easy the Covid exit could be for the country. Also, President Xi Jinping’s third term is unlikely to be pro-business, and we doubt party leaders will turn to a pro-risk approach. We recently reduced our Chinese equity exposure in light of this uncertainty.
THIS MONTH'S SPOTLIGHT
WHAT NEXT FOR UK INTEREST RATES?
The Bank of England (BoE) raised interest rates by 0.5% in December, less than the previous month’s hike of 0.75%. The bank is now likely to start looking into how far away a ‘peak interest rate’ could be.
So what might happen to UK interest rates next year? We believe they will peak at around 4.25% to 4.5% next May. The first BoE decision, in February, could still mean another 0.5% rise, but we could see smaller, 0.25% moves in April and May.
But as Sven points out, there are many factors at play.
He said: “The forthcoming recession in the UK could be deeper than we expect, which could cause interest rates to peak sooner, but none of the surveys suggest that yet. On the other hand, strong private sector pay growth suggests risks of inflation becoming more embedded and requiring higher rates for longer.”
UK inflation is, we believe, near its peak currently and should slowly decline towards 6% by next summer.
Look out for our investment outlook for 2023 in January. You can find out more about what’s happening in financial markets and how it impacts your investments by speaking to your private banker.
Catch up with all our latest views through our insight articles and weekly podcasts.