WeeklyWatch – UK markets fall as recession fears grow

27th June 2023

Stock Take

Persistent UK inflation struggles dominate economic news

Expectations in the lead-up to last week were for a moderate drop in inflation, given that the Bank of England (BoE) had already raised central interest rates multiple times. The US and eurozone both reported drops in their inflation the week before.

The BoE responded to this news by raising the basic rate of interest to 5% – a 0.5% jump – which was larger than many expected. They also indicated that further rises should be expected over the rest of the year.

Speaking to broadcasters after this news, BoE chief Andrew Bailey reiterated the importance of reducing inflation to its 2% target. He said:

“To do that, I have to be clear – and we expect inflation to come down this year – to do that we cannot continue to have the current level of wage increases. And we can’t have companies seeking to rebuild profit margins which mean prices continue to go up at their current rates.”

The risks of high inflation are widely known, and reflected in the average weekly shop, but the dangers of higher interest rates are becoming an increasingly political issue for the government. Think tank Resolution Foundation estimate that according to market trends, households remortgaging next year will experience an average annual mortgage bill rise of £2,900. Next year there will also be a general election.

It’s unsurprising that these higher-than-expected inflation and interest figures caused markets to fall generally in the UK. The FTSE 100 ended the week down 2.4%, while the FTSE 250, which is more volatile, ended 5.1% down.

Markets fear recession

Azad Zangana, Senior European Economist at Schroders, said market reactions indicated rising fears of a recession. He added:

“The BoE recently admitted that its forecasts have not been performing well enough, and an external review of its processes may follow. It suggests that the Monetary Policy Committee (MPC) is no longer placing much emphasis on its analysis, and instead being forced to raise interest rates until the macroeconomic data worsens. Given that interest rates work with a significant lag, lengthened by developments in the mortgage market, it may mean that the MPC can no longer wait and allow inflation to fall back more gradually.”

The BoE is due to release a Financial Stability Report in July, which, given recent events, might garner more mainstream interest than usual, as it will likely have a large impact on just how high interest rates can go.

Markets generally down across the Western world

In the US, comments made by Federal Reserve Chairman Jerome Powell at a Congress testimony undermined performance. The S&P 500 posted its first weekly decline for six weeks (-1.4%), with value stocks continuing to underperform.

The US economy has continued to perform relatively well despite rising interest rates. In contrast to the UK, inflation has fallen throughout the year – although it remains well above the 2% target. Although the Federal Reserve paused interest rate rises last month, it made clear this was only a temporary halt and that more increases were probably on the way.

Kristina Hooper, Chief Global Market Strategist at Invesco, noted:

“If the Fed does tighten two more times this year, I believe it really risks overkill – sending the economy into a significant recession. I’m sounding like a broken record, but I’ll say it again: there is a lengthy lag between when monetary policy is implemented and when it actually shows up in the real economy data, which Powell acknowledged in the press conference. We haven’t seen much of an impact yet because of that lag. That’s why we have to worry so much about overkill.”

Poor performance was recorded elsewhere. Growing rate hike expectations and recessionary fears were also an issue on the Continent, with the MSCI Europe excluding UK Index ending the week down 2.8%. Moving to Asia, the Nikkei 225 in Japan fell by 2.7%, although this may have reflected profit-taking after an incredibly strong start to 2023. As for China, the Shanghai Composite lost 2.3% in what was a holiday-shortened trading week.

Wealth Check

When a company is passing revenue milestones, it’s common for ceilings to be hit and for leaders to reassess the skills needed to reach the next level. That might mean upskilling or restructuring a management team.

When a ceiling is approaching, your business becomes less efficient and produces less profit for the same effort and resources. It could therefore be time to reassess your goals and strategic priorities, review existing board members’ skills against new plans and see where you need to reskill, rehire or replace.

A growing business needs to acquire many wide-ranging skills, such as:

  • A more experienced sales leader to achieve higher numbers, build a sales team or use their experience of international sales to attract overseas customers
  • A finance director to ensure the fiscal rigour necessary to optimise and protect a larger business
  • A leader with experience of mergers and acquisitions, to grow your business
  • A production director to introduce efficiency-building disciplines in your growing production or manufacturing capabilities
  • Specialist distribution experience – such as a director of distribution – to cope with greater demand for your products.

Conduct a thorough strategic review of your business, including a financial analysis and a feedback process across all staff and leaders. Use this to find out what you as a firm already do well, need to improve or need to do more or less of.

As part of this reassessment, linking strategic goals to daily tactical behaviour is critical. Ensure your job descriptions and incentive schemes for your senior leaders, especially bonuses and commissions, reward the right performance to support the business goals. These could be profit margins, order-turnaround speeds and conversion rates for the products, services or geographical areas you want to target or improve.

If you’re looking at new hires or other expansion opportunities and want to review your finances to help make these work, contact us today.

In the Picture

Despite recent increases, the rate of interest remains notably below the rate of Consumer Prices Index (CPI) inflation. This means money saved in a cash bank account will lose purchasing power over time.

The Last Word

“It’s a very special and emotional night for me as it may be my last ever show in England, so I better play well and entertain you as you’ve been standing there so long.”

British pop legend Elton John plays the last UK show of his Farewell Yellow Brick Road tour to a Glastonbury crowd estimated at over 120,000 people.

Invesco and Schroders are fund managers for SJP.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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SJP approved 26/06/2023