Market Update | Fighting the Fed & Buying the Dip

IBOSS Market Udpate August 2022

July was a much more positive month for markets as global equities made a stellar return of 7.72% (MSCI World), the highest monthly return since November 2020 and only the second month this year to post positive figures (the other being March). However, it was not only equities that surprised the upside, as a broad range of fixed income assets posted positive returns of circa 3.54%. In short, both bonds and equities rose together.

Perhaps the most interesting point to highlight about these returns is that the market backdrop has not fundamentally changed from prior months. Inflation remains high across a broad swathe of developed market economies, supply issues continue to impact several industries, and geopolitical tensions remain elevated.

Amongst these issues, there has been an ongoing debate about whether we are facing a global recession and, strangely, what exactly constitutes a recession. Meanwhile, the Fed, and other developed market central banks, continue their path of interest rate tightening.

Fighting the Fed & Buying the Dip

Value stocks have consistently outperformed throughout the majority of 2022, and against the backdrop of rising rates. Data up to the end of July shows that value stocks have made a positive return of 2.5% vs the tech-heavy growth index return of -10.5% in 2022.

Perhaps most peculiar about July is how this pattern has reversed. Global value stocks posted a respectable 4.4% return but paled compared to the 11.3% made by global growth stocks in July. The reversal could show that many investors are looking to buy the dip in the popular retail assets that have previously dominated headlines and outperformed in a low-rate environment. But instead, these self-same investors are now, perhaps unknowingly, buying the dip in the face of relatively straightforward central bank policy. Essentially, these investors are now fighting the fed, an approach to investing that has been remarkably unsuccessful since central banks became intrinsically linked with asset prices many years ago.

We cannot say how long this will last and what the result will be, but we would caution investors against being too exuberant considering the fundamental market backdrop. Conversely, we would also caution investors against being too pessimistic. July has demonstrated how quickly markets can turn around, and missing the best days can greatly impact client valuations. As ever, we feel that diversification is increasingly essential as the wider range of potential outcomes develops.

China & Emerging Markets

July saw far less market exuberance in China as investors seemed disappointed with the lack of action from the Chinese authorities, following the supportive comments in the middle of March of this year. Though the Chinese market fell by 10% in July, it is worth noting that they have outperformed global equities by 20% since March (15.03.2022) on the back of the announcements. Conversely, India was one of the few regions to outperform developed markets, but both India and China have proven to provide meaningful diversification benefits against developed markets (fig 1).

Regional Correlation with Global equities over 3 Years to 31.07.2022 (fig 1)*

Source: FE Fund Info

Past performance is not a reliable indicator of future performance, please refer to our important information on the back page for a full list of risk warnings.

UK Pessimism

There has been much discussion over recent weeks about the comments from Andrew Bailey, governor of the bank of England, and their pessimistic outlook on the situation facing the UK economy. We will not comment too profoundly, other than to say that much of the developed world faces many of the same headwinds as the UK. The critical difference is that our central bank has perhaps been more honest than some.

It is also worth remembering that markets and the economy rarely move hand-in-hand. As with the pandemic, markets can price in economic uncertainty much faster and ultimately recover more quickly. Considering this, we remain positive on the outlook for UK equities. Not only do UK companies still look relatively well valued against many other developed nations, but the make-up of the UK is markedly different from areas like the US. The FTSE 100, for example, has large holdings in oil/gas and financials, all of which could perform well if inflation and interest rate rises continue. After all, the UK is still the best performing developed market this year.

Finally, it is worth mentioning currency and the place of sterling in an investor’s portfolio. Over recent years, the dollar has strengthened significantly against a basket of other global currencies and has been highly beneficial to UK investors investing in, the US, for example. However, there is a benefit to holding a variety of currencies within a portfolio, and having sterling-denominated assets will help soften the blow if the dollar was to face a period of weakness. The chart below (fig 2) demonstrates how poorly US equities would have performed over the last year without the tailwind of a weakening pound, with currency moves equating to a circa 13% difference in returns.

US Equities 1 Year to 31.07.2022 (fig 2)*

Source: FE Fund Info


*Some information displayed may be short term in nature to demonstrate performance over a specific time period. Please contact IBOSS for long term data, including since launch and/or 5 years. Past performance is not a reliable indicator of future performance, please refer to our important information for a full list of risk warnings.

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IAM 206.8.22