12 July 2022
Scandals and resignations
As political change took hold, the FTSE 100 market fell marginally last week.
UK Prime Minister Boris Johnson has come up against questions surrounding the way he handled former Deputy Chief Whip Chris Pincher, who has encountered a series of accusations regarding his sexual misconduct. The week began with UK Chancellor Rishi Sunak handing in his resignation from his position as Chancellor, with Health Secretary Sajid Javid following suit.
Despite the fact that the FTSE 100 had had a difficult start to the week, it did, in fact, remain largely flat, given Johnson’s news. The more domestically focused FTSE 250 saw a rise of 0.3% following the announcement.
Ben Lambert, Portfolio Manager at Ninety One, gives his opinion on the meaning of Johnson’s resignation:
“Our base case view is that Johnson’s resignation will have greater party political rather than economic policy implications in the near term. This is because his successor’s legitimacy remains nominally tied to the policy platform that received an electoral mandate in 2019.
“This view is, of course, contingent on his eventual successor not calling a snap election, which we don’t anticipate in our base case but acknowledge is a non-zero probability event. The limited immediate reaction in equity markets would seem to confirm this view.”
Bookmakers are betting on Sunak being the favourite to succeed and continue the economic policies of Mr Johnson. Other rival candidates have insinuated that they would consider further fiscal spending or tax cuts, or, indeed, a return to austerity.
Azad Zangana, Senior European Economist and Strategist at Schroders, observed:
“The outlook hinges on who Johnson’s replacement will be. A return to traditional Conservative politics will probably bring about some austerity over the next few years, but also a return to business-friendly policies. However, another populist politician could lead to more of the same approach for the economy.”
With inflation persistently rising, the UK dealing with a cost-of-living crisis, and many Brexit-related questions continuing to pose challenges (for instance, the Northern Ireland Protocol), Johnson’s eventual successor will have a host of immediate issues to tackle, and their policies could affect the outlook for UK companies over the latter half of 2022.
Light on the US horizon?
Following a tough first half of the year for US markets, the S&P 500 and NASDAQ Composite experienced a more positive start to the second half of the year, rising 1.94% and 4.56% last week, respectively. Adrian Frost from Artemis highlighted that since 1957, in the years the S&P 500 had a negative first half, it’s also fallen in the second half around 50% of the time.
“Although it’s been better this week, sentiment on the whole remains understandably fragile: machines seem to be chasing different parts of the market up or down, depending on the latest macro data, such as the latest on US employment.”
This employment data revealed that payrolls rose by 372,000 in the US in June – way above the consensus expectation of 265,000. The relatively healthy job market would indicate that the Federal Reserve will probably continue to increase interest rates when the issue is next discussed at the end of July – most are anticipating another rate rise of 0.75% or 0.50%.
Felipe Villarroel, Partner at TwentyFour Asset Management, proposed that some of the drivers of the high inflation may be coming down, even though the market may not yet be bottoming out.
Oil and gas have been major drivers of inflation so far this year. On the other hand, he commented that, over the past month:
“Most commodities have seen price declines that are quite substantial, with oil falling close to 10% in a day this week and down 17% in the last month. One-month performance in other products has followed suit, with aluminium down 12.25%, copper and nickel down around 20% and notably wheat down 27.5%.”
Proceed with caution
Nevertheless, it’s vital to remember that the situation continues to be volatile. This week, for example, Russia is temporarily shutting down its gas pipeline, Nord Stream 1, for repairs – this will most likely further inflate prices, and could have a knock-on effect on European markets.
The Fed’s efforts may be starting to pay off if these are falling due to slowing demand. Only once they’ve reduced inflation will they start to loosen their grip on their monetary policy.
Keeping things in perspective is key – however, there are still many future headwinds that will undoubtedly keep the investment environment difficult. The Russia–Ukraine war is showing no signs of abating, and there remains a definite risk of recession, for instance. As far as investors are concerned, we’re not out of the woods yet.