Investment markets in May experienced volatility amid concerns that economies could fall into a recession as inflation pressure remains high.
While it is completely natural to be worried about the volatility investments have experienced in recent times, it is important to consider this in the long-term context. Over the long term, a well-diversified investment strategy has always overcome periods of volatility to deliver returns and like all other major economic concerns that have come prior to recent events, this too shall pass. A long-term time frame can help smooth out the peaks and troughs of markets. This is because, historically, markets have recovered when you look at the bigger picture.
At the end of May, chancellor Rishi Sunak unveiled a package of measures designed to alleviate some of the cost-of-living challenges families are facing.
The £15 billion package will be paid through a levy on the profits of energy companies, known as a “windfall tax”. Among the measures introduced were one-off payments to vulnerable families and support to reduce energy bills for all households.
The measures were made after the latest inflation figures show that, on average, prices increased by 9% in April – the highest level since 1982.
This led to the Bank of England (BoE) raising its base interest rate for the third time this year to 1%. It’s the highest the base rate has been in 13 years after it was cut following the 2008 financial crisis.
Inflation is also affecting the value of salaries. Figures from the Office for National Statistics (ONS) found that regular pay, which excludes bonuses, increased by 4.2% in the three months to March. While this may seem positive at first, once inflation has been factored in, salaries have fallen in value in real terms.
Unsurprisingly, this is affecting consumer confidence.
A consumer confidence index from GfK suggests that sentiment levels have fallen to their lowest point since records began in 1974. The index measures how people view their personal finances and wider economic outlook.
However, according to Barclaycard, consumer card spending grew 18.1% in April when compared to the same period in 2019. After two years of cancelled holiday plans, the travel sector saw its best month since the pandemic.
From a business perspective, inflation is also affecting operations and confidence.
A report from S&P Global and CIPS found UK factories are facing price hikes. 85% of companies said their purchase prices have increased, while no firms reported a decrease. In addition, new order growth hit a 15-month low.
The poor demand has been linked to a range of factors, including ongoing lockdowns in China, the conflict in Ukraine, and Brexit.
As a result of these pressures, ONS figures show GDP fell by 0.1% in March, leading to concerns that the UK could fall into a recession in 2023.
The effect of the conflict in Ukraine and the inflation pressure it has led to is reflected in the European Commission (EC) downgrading its growth forecasts.
The EC now predicts real GDP growth in both the EU and eurozone of 2.7% for 2022. This compares to a previous forecast of 4% just three months earlier.
While the European Central Bank (ECB) didn’t make any changes to its base interest rate in May to control inflation, president of the ECB Christine Lagarde has indicated a rise will happen in July.
Data from Germany, the largest economy in the EU, demonstrates the challenges that many European countries are facing.
German producer prices have increased by 33.5% in the year to April, with energy prices surging by 87.3% to drive this increase. Some German businesses are also being directly affected by the conflict in Ukraine – exports to Russia have fallen by nearly two-thirds when compared to last year and are now at their lowest levels in almost two decades.
Inflation in the US almost reached a 40-year high in March, with prices rising 8.3% year-on-year. Once again, energy and food prices are driving this rise.
In response, the Federal Reserve raised its interest rate by 50 basis points to a 0.75% – 1% range. The organisation also noted that ongoing increases to the interest rate may be appropriate to try to get inflation under control.
While the University of Michigan’s index of consumer sentiment fell to its lowest level since 2011, data suggests that consumers aren’t cutting back their spending yet. The value of retail sales increased by 0.9% in April.
However, payroll data indicates that businesses are being more cautious than expected. In April, 247,000 new jobs were created, according to ADP. While the number of jobs is still growing, it’s significantly below the 390,000 expected.
US company Apple has lost the title of the world’s most valuable company. As oil prices soared, so too did the value of Saudi Arabia’s oil giant Saudi Aramco, which has now surpassed Apple.
Elon Musk’s bid to buy social media platform Twitter has also continued to make headlines. The $44 billion (£34.8 billion) deal is temporarily on hold as Musk is seeking details about spam and fake accounts. The news led to shares in the company falling by 10%.
China is also facing challenges as it continues to enforce ongoing lockdowns in certain areas.
The lockdowns, along with consumers cutting their spending – retail sales fell by 11.1% in April – and falling industrial production have slowed the economy’s growth. In turn, there are more unemployed people compared to a month earlier.
Like many other countries, China is battling rising inflation, which has been linked to currency weakness, and food and energy prices rising.
If you’d like to discuss your investment strategy or how events have affected your portfolio, please contact us.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.