Global markets experienced another poor month, bringing another difficult quarter to an end. Inflation fears dominated investor focus at the start of June, but by month end, the market’s attention shifted to economic growth concerns and recession risk as consumers battled with higher prices and higher borrowing costs.
Developed market equities (MSCI World) fell -8.6% in June and had their worst first half of the year in over 50 years, down -20.3%. Government bonds (Barclays Global Aggregate) were also hit (-13.9% year-to-date) providing limited protection for multi-asset portfolios. Over the quarter, value (MSCI World Value) fared best, down -11.4%, whilst growth stocks (MSCI World Growth) experienced a larger drawdown, falling by -21.1%. Global bonds (Barclays Global Aggregate) ended the quarter down -8.3%, as markets priced in further interest rate increases. Globally, valuations are now below their long-term average in every major region other than the U.S, creating some attractive long-term opportunities.
In the U.S., data released in June showed that the U.S. economy decreased at an annualised pace of 1.6% in the first quarter, reflecting a deeper contraction than previously reported. While unemployment remains low (3.6%) and wage growth robust, consumer sentiment (as measured by the University of Michigan Consumer Sentiment Index) has fallen sharply to its lowest level on record. U.S. home sales also fell to their lowest level since June 2020 as fixed mortgage rates have risen from below 3% at the start of 2020 to nearly 6% (U.S. housing contributes 15-20% of GDP).
U.S. May inflation (+8.6% y-o-y) came in above the recent peak of 8.5% y-o-y in March, alarming markets. The Federal Reserve responded by announcing a 0.75% rate hike days later. Markets are now expecting interest rates to rise to 3.4% in the U.S. by next year, as the Fed attempts to rein in inflation in the wake of growing recession fears and a slowing economy.
Consumer confidence in Europe also declined significantly, in line with global peers. On top of an already bleak economic backdrop, the European economy is facing significant risk, as any reduction in Russian gas supply can severely damage the European economy. The fossil fuel price has sky-rocketed by 700% in Europe since the start of 2021. Inflation in the eurozone soared to 8.6% in June, driven by higher energy and food costs. The European Central Bank is poised to raise rates by 0.25% in July despite market’s expectations of a higher figure. Markets are now expecting interest rates to rise to 1.6% in eurozone by next year.
In the U.K., business confidence fell to a 15-month low, with firms also reporting a moderation in hiring intentions. Inflation rose to 9.1% in May, forcing the Bank of England to raise interest rates by a further quarter of a percentage point in June. Markets are now expecting interest rates to rise to 3% in the U.K. by next year.
Chinese markets had a strong month, as the country begins to emerge from its severe Covid-19 lockdown. Signs that the tech sector crackdown may be easing, also boosted sentiment towards the region.
The South African (SA) stock market recorded its biggest monthly fall (FTSE/JSE Capped SWIX -7.5% MoM) since the start of the pandemic in March 2020 as the benchmark followed global peers lower.
SA’s inflation rate hit a 5-year high in May, coming in at +6.5% y-o-y vs 6.1% expected, breaching the South African Reserve Bank’s 6% ceiling. The jump was largely attributed to a rise in food (+6.3% y-o-y) and fuel (+32.5% y-o-y) inflation. Eskom woes worsened over the month as unprotected strikes forced the power utility to implement stage 6 loadshedding for the first time since 2019. South African consumer confidence tumbled to its lowest level in more than three decades according to the FNB/BER Consumer Confidence Index.