13 December 2022
Back to reality following World Cup defeat
For a time, the World Cup was providing a happy distraction from the current recession, rising interest rates, high inflation and a series of national strikes in December for English football fans. Sadly, Saturday’s defeat by France will have served as a shocking return to reality.
Unfortunately, if the bank raises interest rates by another 0.5% as predicted, the upcoming week is going to be even more challenging. This means that the UK would end 2022 with interest at 3.5%, as opposed to the 0.25% it started with.
Mark Dowding, Chief Investment Officer at BlueBay, did in fact call the UK’s outlook “grim”, noting:
“With real disposable incomes forecast to fall 7% over the next two years, workers across several industries – railways, teachers, nurses, postmen, border control – are striking on higher wage demands. With no political will to change direction, the strikes look set to continue into 2023, paralysing many parts of the economy.
“Meanwhile, the Bank of England is boxed in, given the mortgage rate pass-through onto the economy. We continue to believe that until there is the political will to bring inflation down, from the government and its institutions, the UK’s economic vulnerability will be laid bare.”
China ease COVID lockdown policies
In China, attitudes have become more optimistic recently. Contrary to the West, which abandoned lockdowns at the beginning of the year, China has maintained its ‘zero-COVID’ policy, causing many Chinese cities to remain under lockdown for much of the year.
As a result of the escalating protests that followed, the government has started to soften these policies over the past few weeks.
For investors in China, coming out of lockdown was at least momentarily joyful as the MSCI China index ended the week 6.6% higher.
Even if it is too soon to assess the impact that the end of China’s lockdown will have in the long run, Absolute Insight’s Adam Wolfe identified four markers to watch out for:
- How does China’s public health fare as it becomes more open?
- How much of an economic disruption can be expected when China transitions out of lockdown?
- What effect will the reopening have on public sentiment?
- What happens as Chinese savers enter the market again?
Wolfe summarised his thoughts on the expected result by noting:
“The bottom line: The end of the zero-COVID policy increases the chances that China’s economy will boom in the second half of next year. But the path forward will be messy. Tracking the public health response, economic disruptions, household sentiment and financial stability will be key over the next six months.”
Inflation is one area that China’s reopening might have an impact on globally. By lowering demand, the zero-COVID policy has helped to lower inflationary pressures this year. When China reopens, demand will increase once more.
Inflation in the UK and the US
This year, the UK saw double-digit inflation. There have been indications that it might be peaking, though. For instance, the Manheim Used Vehicle Index fell 0.3% in November (or 14.2% compared to November last year). The CEO of US housebuilder Toll Brothers also recently asserted that construction costs are starting to decline.
However, Martin Hennecke, Head of Asia Investment Advisory and Communications at St. James’s Place, warns:
“Investors might be well advised not to become complacent about inflationary risks altogether, noting that a weakening US Dollar, China re-opening unleashing pent-up demand and, somewhat ironically, higher interest rates themselves, could all turn out to rekindle inflation longer term.”
In the US, the latest inflation figures are set to be released this week, and the Fed will meet to decide how much to raise interest rates in the following months. Despite good economic indicators, US markets actually declined last week. This has happened because stronger economic data may offer the Fed more leeway to raise rates.
It is worthwhile emphasising the significance of having a well-diversified portfolio once more in light of the fact that different regions of the global economy are at different phases of their post-COVID recovery. This will help to smooth out some of the volatility markets are currently experiencing.