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Investment Update: Market Commentary Q3 2022

Investors continue to find themselves in turbulent times with investment markets facing the impact of actual and expected interest rate rises as the central banks tackle the ongoing surge in inflation.

The quarter started with negative returns in equity markets however after the dip which lasted a couple of weeks, most equity markets rallied through the majority of July and August. This optimism within markets was short lived as it became evident that central banks on both sides of the Atlantic were prepared to aggressively raise rates to combat the rising inflation. The sharp hikes to interest rates caused equity markets to fall back and experience further volatility, causing most regions to end the quarter with a negative return.

Q3 2022 index performance

Q3 2022 index performance

The chart above shows the global performance of the world’s major financial indices over the past quarter, this provides an indication on how global markets have behaved. As we can see, the quarter was another volatile time for investment markets, with most indices failing to finish the quarter in positive territory. The US based S&P 500 demonstrated a steep recovery from its June lows, however the rally ended in August following central banks aggressive policy actions to combat inflation.

Asia and emerging markets started the quarter with some stability however the regions weren’t immune to the additional market volatility finishing the quarter again with negative returns. Whilst Asia and Emerging markets experienced a steady start to the quarter, the Japan based Nikkei experienced a far more aggressive, sharp rise in July and into August. However, like the US, the index suffered through the latter half of the quarter and lost much of the gains achieved.

The UK Based FTSE All share continued to go through volatility with the raised concerns around the political uncertainty, and doubts over the country’s political leadership.

UK Political uncertainty

Alongside this heightened market volatility, we have seen a continuation of uncertainty within the UK economic and political climate. The now ex chancellor Kwasi Kwarteng delivered a controversial mini budget, targeted to promote economic growth, however the market took this as boosting inflation at a time when the Bank of England was already having to raise rates to fight inflation. After significant backlash, the budget has been almost entirely undone with the new chancellor Jeremy Hunt.

Monetary policy

Central banks continue to raise rates around the globe. The US Federal reserve has increased rates by 3% in the past 6 months and it is expected to see further tightening policies to come out from the remaining meetings this year. The pace of policy tightening is less aggressive in other areas of the world, the Bank of England has raised rates 2.15% since the first rise in December. The European central bank has moved significantly slower and only started raising rates in July by 0.5% and then adding an additional 0.75% in August. Asia has taken a completely different approach, with Japan holding off from any interest rate rises and China opting for loosening monetary policy rather than tightening.

Inflation continues

The conflict in Eastern Europe between Ukraine and Russia sadly continues, with Ukraine claiming back some territory, Putin has adopted more aggressive tactics by further restricting gas supply to Europe. Whilst much of Europe has been building up the reserves in preparation for the winter, as well as regulating to cut demand it still seems that the coming winter could be particularly challenging. The fear of an upcoming Global recession continues to grow, which has been leading to a decline in the price of oil, which has helped to reduce some of the inflationary pressure. However, inflation very much remains at the forefront of our concerns as the Eurozone inflation topped 10%. UK CPI figure in September was published as 10.1% and the concerns surrounding the cost-of-living crisis very much remain.

FCFP portfolio performance

q3 2022 portfolio performance

The chart above shows the performance of our FCFP portfolios during the second quarter of 2022 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, we expect to see a more volatile experience compared to all 3 FCFP strategies which invested globally and adopt a more diversified, risk aligned investment strategy. The recent quarter shows the portfolios manage the global markets slightly better than the UK based FTSE All share.

Longer term performance

q3 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.

Looking ahead

2022 has been a challenging year, not just for investment markets but for global economies as well. Inflation has been at the forefront of everyone’s minds and investment markets continue to battle through increased market volatility. The recent market volatility has made certain investment styles fall out of favour. Through the previous phase in the market cycle, where interest rates remained low, it was the forward-looking growth focused businesses which reaped most of the market returns. As the market adjusts and the economy attempts to normalise, our investment managers’ focus steers towards seeking high quality businesses, with strong balance sheets and promising business plans for the next stage of the economic cycle and beyond. 2022 has been a year where many investment managers have felt there is ‘nowhere to hide’ when it comes to investment portfolios, the sharply rising rates combined with the ongoing concern of surging inflation present challenges to all areas within investment markets.

The selloff within government debt-based investments was something which took investment markets by surprise. This resulted in many cautious strategies, particularly those with a higher allocation to government bonds, to face higher levels of volatility than typically expected. Reassuringly, more recent government bond yields have priced in further policy tightening and are already reflect the heightened credit risk within markets. This reassures us of their credibility as constituents within a long-term investment portfolio.

We continue to closely monitor the macroeconomic environment and remain in regular communication with our investment management partners to make sure our recommended strategies are well placed for long term growth. This does not mean the strategies are immune to broad market declines, though we remain confident that a sensible approach adopting diversification with a key focus on quality, is a credible strategy for recovery and long-term growth. Our core message remains to stay calm and remind yourselves of the long-term investment strategy. Whilst short term volatility can be difficult to endure, the long-term benefit of remaining calm has historically always come out on top. Research has repeatedly shown that it is the panicked investor who sells amidst market volatility who falls short of the patient long term holder.

Please continue to refer to our insight blogs and if you require any additional information, please get in touch with your local financial planner.

Mashud Rahman
Featuring: Mashud Rahman
Mashud is our Investment Consultant who joined us in 2018. He sits on our Investment Committee where he works closely with our Investment Management partners… read more

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