September was a very challenging month. War, rising inflation, rising interest rates, slowing growth, energy crisis, good and bad budgets and falling markets!
Source MSCI. MSCI ACWI (local currency)
Summing up September
- Perhaps the most significant and worrying development in the month was the escalation of the war in Ukraine. Putin’s move to annex close to 15% of Ukraine’s land, call up over 300,000 army reserves and threatening (again) to use nuclear weapons adds significantly to the uncertainty of how this war will play out.
- We expected the ECB to raise rates by at least 0.5%; in the end they raised rates by 0.75% as they struggle to get on top of inflation.
- Meanwhile inflation hit 10% in the Euro area.
- Ireland’s Budget 2023 was delivered and positioned as a “cost of living” budget. It appeared a sensible budget when compared to the UK mini budget which markets reacted very negatively towards.
- The UK mini budget introduced by Liz Truss and Kwasi Kwarteng led to a very sharp rise in UK long bonds yields and a slide in the value of Sterling. This in turn created problems for some UK pension funds that use derivatives as a way to manage inflation and interest rate risk. Ultimately the Bank of England had to step in to calm markets with a £65bn bond-buying programme.
- Last month I spoke about the energy crisis and expressed the view that surely governments would need to step in to support households and businesses. We saw that happen this month. In Irelands case, while the measures introduced in Budget 2023 are welcome, they are unlikely to be sufficient for some smaller businesses who are dealing with crippling and unsustainable increases in energy costs.
- The Euro decline against the US dollar continued and finished the month below parity at €1 = USD$ 0.97.
- At the end of September the OECD released it latest economic forecast and it’s key points were:
- The world economy is slowing more than anticipated
- Inflation has become more widespread
- Inflation will ease next year but remain at high levels
- Energy shortages are a very real risk in Europe this winter
So how did markets react against this backdrop?
September was a bad month in markets as they continued the downward direction that started at the end of August.
*As at 30.9.2022
Our Investment Outlook
Our view is as follows:
- We are in for a tricky couple of years and economically things will get worse before they get better.
- Central banks will continue to raise interest rates even in the face of slowing growth. In the EU we can expect further rate increases in October and December.
- Markets will continue to be very volatile.
- The rise in bond yields means that in time bonds will become a more interesting investment for long-term investors.
- However, the more immediate impact of the sharp rise in bond yields is that it is causing a repricing of lots of other assets and you can expect to see that downward pressure show up in property, private equity and other illiquid asset prices.
- As higher costs begin to bite on household incomes expect consumer spending to reduce and ultimately this will feed into reduced company earnings.
- Financial stability is now back on agendas as the UK mini budget fiasco reminded everyone to expect the unexpected.
- Equity markets have now retested and gone below the previous lows of June. They may well fall further but as the equity markets are forward looking our sense is they will turn before we have experienced the worst of the economic fallout.
Our Current Advice
Our advice remains unchanged: For short-term investors, this is not a market to be in. But for our clients who are long-term investors with a well-structured investment plan, we continue to advise them to follow their plan and use market weakness to build on positions.
John Tuohy is Chief Executive of Acuvest, an Irish-owned, independent advisory firm specialising in wealth management, pensions, and investment advisory services for individuals, companies, pension schemes, charities, and institutions. John is a Chartered Financial Analyst (CFA) and a Fellow of the Chartered Association of Certified Accountants.
