Economic Market Update 14th of September 2022

If there is one thing our world has in abundance it is uncertainty. Despite all of our successes over human history – uncertainty is something that we are still apprehensive of and seek to avoid at all costs.

From an economic standpoint, global uncertainty is higher than normal – perhaps the last time we all felt this way was during the first lockdown in the pandemic.

Whilst we have been focused on the humanitarian impact of the war in Ukraine – the “Energy Crisis” that has ensued was hard to predict. It was no secret that oil and gas prices would rise – but few predicted that the long-term impact would be felt globally to the extent we are all experiencing.

The worry we are all having at the moment is three-fold. Inflation, interest rates and energy prices.

Inflation is still at a recent high – in the UK especially, it doesn’t show strong signs of waning at least for the next 6 months. In the US, inflation does seem to be coming under control, but we are still looking at levels not seen since the 1980’s.

Interest rates are being hiked by central banks as a way to reduce the money supply within the economy. Rate hikes makes all debt more expensive to service, mortgage rates in the UK have risen from ~1% to over 3%. This for many means thousands more pounds annually to service their mortgage.

Finally, we have energy price rises by an order of magnitude. Small, medium and large enterprises are seeing 2-4x on their annual energy bills and this is before we take into account the cost increases at home.

From a capital market perspective, the above hits businesses in three separate ways – inflation reduces the value of future earnings, interest rate hikes make their borrowing more expensive and energy prices make operating much more costly.

Additionally, as bills increase at home – consumers have less income to spend on discretionary goods meaning companies will find it harder to generate sales than during a period of economic boom.

UK Prime Minister, Liz Truss has announced an energy price cap to span over the next two years limiting the average UK home energy bills to £2,500 per annum. This will be carried out in line with the additional £400 per home subsidies arriving in the winter meaning that the average cost of energy for the homeowner should be £2,100 this year.

This all feels very doom and gloom – there is no escaping the fact that it has been a tough year. It also doesn’t feel like we have had enough of a respite period from the tough years found during Covid-19.

However, I am a big believer that it is always darkest before the dawn.  

Fundamentally, we are aware of the issues we are facing, so collectively we can do what it takes to rectify them. Energy prices, interest rates and inflation are all tough obstacles to navigate – but we know they are there.

As Mark Twain once famously said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” We are now informed of what our problems are which means we can arm ourselves against them.

A few weeks ago we had a huge rally in global stock markets – the catalyst for this was on a seemingly small amount of good news.

For a complete recovery, we do need things to settle and that may not happen overnight. Market recoveries often mimic their descent – the slow decline we have faced this year is likely to result in a gradual recovery. We can’t be sure when it will happen but we have been through significantly worse crises than the one we are currently facing.

As ever, the best strategy is to remain invested throughout the ups and downs, weather the storm and we will be here throughout to provide guidance, reassurance and information. If you have any questions for your adviser – please feel free to get in touch with them and they can address your specific situation.