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3rd November 2022
Cappuccino Commentary
A relaxed read on the issues of the day
Equity markets endured another difficult month with most regions falling in absolute terms. Growing concerns regarding persistently high inflation and the prospect of higher interest rates weighed heavily on markets over the period. In addition, the war in Ukraine has also proved to be a headwind to markets with no immediate resolution in sight. Emerging Markets was the worst performing region over the month. This was largely attributed weakness in China where persistent COVID lockdowns have hampered economic growth. There was not much performance differentiation between Developed regions. That said, UK smaller companies had a particularly challenging month due to domestic headwinds and the fact they benefit less from a weaker pound versus larger export driven companies.
The market response to the UK’s ‘mini-budget’ was arguably the most impactful event over the month triggering considerable volatility across fixed income and currency markets. The budget included several unfunded tax reductions as well as support by the government to help manage energy bills and stimulate growth. All in all, the value of the cuts was expected to amount to £45bn by 2027, twice as much as markets had anticipated. This was viewed negatively by investors leading to a dramatic fall in the pound as well as UK government bonds. This further prompted the Bank of England to intervene to help stabilize the markets. Outside of the UK, global investment grade and high yield bonds also finished the month with losses.
Commodity prices were down in aggregate in September. Energy prices fell over the month, led by natural gas in Europe, followed by crude oil. Overall weakness was driven by signs of global economic slowdown as well as Europe’s ability to secure some liquified natural gas imports to help reduce reliance on Russian supplies. This was despite news late in September that both Nordstream 1 & 2 gas pipelines had experienced major explosions and subsequent leaks prompting speculation of international sabotage. Outside of energy agricultural commodities were flat in aggregate while base metals and precious metals fell over the month.
In conclusion, September proved to be a challenging month for investors in what has been a very difficult year so far. Given ongoing uncertainty with regards to inflation and heightened geopolitical risks, we expect volatility to remain elevated for the time being and believe a cautious stance is warranted. Looking further ahead, we believe opportunities are beginning to open up and we will be looking to take advantage of better valuations in the months to come.