Much like Q1, the second quarter of 2022 has proven to be a challenging time for investment markets. Central banks continue to tighten policy to combat continued rising inflation. The conflict between Russia and Ukraine continues to see additional sanctions being placed on Russia, contributing further to already rising energy prices. In addition, Ukraine’s grain supplies being cut off along with higher input costs is also causing the price of food to spike.
These increases combined with an environment where interest rates are rising is having a clear impact on the end consumer, sparking fears of a cost-of-living crisis and a recession. The expectation continues to be for interest rates to rise and in the UK and we don’t think we have seen inflation hit its peak. However, recent data is beginning to show consumer confidence slowing slightly, which in turn will have a positive impact on the inflationary pressures the market is facing.
Q2 2022 Index Performance
The chart above shows the global performance of the world’s major financial indices over the past quarter which provides an indication on how global markets have behaved. Recent geopolitical events and the continuing concerns around rising inflation and interest rates continue to apply pressure to the economy as we continue to see all round financial markets struggle. Rising interest rates is something markets have not had to deal with in a long time, as a result we are seeing the fixed income investments go through a period of volatility, as seen with line E on the chart above representing UK Government bonds.
The American S&P 500 experienced the worst quarter in Q2 with quarterly losses of just over 9%. As we have seen consistently over the past few quarters, short term losses are becoming the expectation within global markets as the world continues to recover from the challenges left behind from the Covid-19 pandemic. The chart shows us it is those regions which experienced the sharpest rises in the past few years now experiencing the greater downward movements. Overall, this is not far from what we would expect over a typical market cycle.
In the UK, with inflation continuing to rise along with interest rates, we have seen volatility in the fixed income area of the market (line E) as well as within the stock market, as shown by line D. The uncertainty around the political environment in the country added to already growing recessionary concerns has resulted in another quarter of volatility for investment markets. The typical UK consumer is now feeling the pinch of raised prices. Data suggests there are lower levels of confidence within buying markets as well as raised demand for lower cost or ‘own brand’ goods coming from a reduced demand for more premium labels.
Asia and Emerging markets, while still showing negative returns over the quarter, have shown the greatest resilience over the past few months. This is partially due to the regions’ ability to retain trading arrangements with Russia, giving supply chains some much needed breathing space which has translated to less volatility within relevant investment markets.
Since 2020, China has demonstrated a militant attitude in its zero tolerance to Covid, which has continued to press challenges on local businesses through repeated shutdowns whereas other countries have almost returned to ‘normality’. However, towards the end of the quarter, we started to see signs that China may finally be putting Covid behind them and move past the days of city-wide lockdowns. China has the potential to return to an economy similar to that pre-Covid, placing the region in a strong position for growth in the rest of 2022.
Central bank tightening
As we saw in the first quarter of the year, central banks have started increasing interest rates to combat the continued rising inflation. This started with the Bank of England (BoE) raising rates by 0.15% in December of last year. Since this initial rise, we have seen four more rate rises of 0.25%. America’s central bank, the Fed, was a touch slower to get going but has applied larger incremental increases, putting the target rate up by 0.75% at June’s meeting. The European Central Bank (ECB) has displayed a much more relaxed approach so far to rate rising, the first interest rate rise being applied just recently in July. On the other hand, Japan has shown to be a real outlier in this discussion, with the Bank of Japan continuing to hold loose monetary policy and keeping rates steady. This has, however, resulted in a devaluation of the Japanese Yen, down 15% this year. Our investment management partners continue to keep a keen eye on global macroeconomic developments and reiterate that decisions with regards to monetary policy and interest rate movements are far from simple.
FCFP Portfolio performance
The chart above shows the performance of our FCFP portfolios since the beginning of the second quarter of 2022 to the end of the quarter against the UK based FTSE All share, which is used as a point of reference only. The FTSE All share, being purely UK-based and built from 100% in equities, is expected to show a more volatile experience compared to the FCFP strategies, which all exercise global remits and adopt a more diversified risk aligned investment strategy. As seen above, the FTSE shows a significantly more volatile journey in comparison to our portfolios, though evidently none of the strategies above have managed to avoid the difficult market conditions we currently find ourselves in.
FCFP Longer term performance
To provide some context for longer term data, the chart above shows the performance of the FCFP portfolios since their inception in 2020. The portfolios now have over 2 years’ performance data in some of the toughest market conditions we have seen.
Keeping on track with expectations
The market has been challenging since the beginning of the year. Geopolitical unrest, hiking interest rates and rising inflation has resulted in seeing higher volatility than we have been used to in the past few years, however when carrying out deeper analysis of the portfolios we remain confident in the long-term investment strategy. It is crucial that in times of market volatility like we are currently witnessing, we remain calm and remind ourselves of the original investment strategy. Our investment partners continue to have a focus on high quality businesses with a global remit and keep sustainability at the core of the strategies.
Our message at Francis Clark Financial Planning remains the same – in difficult times like those we are in now, it is more important than ever to ensure your financial affairs are placed appropriately. Market volatility is nothing new to the world of investing and we have enjoyed one of the longest bull runs in history. Therefore seeing a period of correction after 12 years is not outside of expectations. Please refer to our recent insight blogs for further information.
If you require any further information, please do get in touch with your local Financial Planner.