Investment Comment
12th September 2022
A shift in seasons
With Canadian Geese replacing Swallows in parks across the UK, so too the investment environment keeps evolving. Data over recent weeks has been mixed. The good news is the energy price cap which, in the UK and across much of Europe, will protect economies from some of the potential pain of higher energy prices. However, compared to last winter, costs faced by households and companies will be significantly higher. Typical households will see energy costs of around £2,500 per annum up from around £1,280 per annum last winter. A UK recession is still likely, but policy actions mean that any recession will be less severe than would have been the case in the scenario where domestic household energy costs would have risen to around £6,000 in 2023.
A shift in foundations
The US housing market is showing signs of cracking. After a recovery in 2020, as household felt the benefit of lower interest rates and fiscal support, the 2022 backdrop is proving more challenging as higher interest rates have had a negative impact on US consumers' willingness or ability to borrow. Home sales have fallen sharply in the past few months which has left unsold housing inventory at recessionary levels.
The number of new homes being sold has fallen sharply in 2022 in the US
Source: Bloomberg
Leaving new home inventory at levels unseen outside of recessions in the US
Source: Bloomberg
With concerns over the profitability of US companies, as cost inflation (i.e. wage inflation) increases, and with headline price inflation (a key drive of revenues) set to slow in coming months, we have moved portfolios to become more defensive following our recent Investment Committee.
One notable event in recent weeks has been the sharp rise in short-dated bond yields. As a result, we have placed the funds raised into short-dated government bonds.
Short-dated gilt yields have risen sharply in recent weeks making them an appropriate defensive asset to own in the face of increased uncertainty
Source: Bloomberg
Gerard Lane Chief Investment Officer
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FP 20220912001 Exp 07/10/22