June Market Commentary
- In June the fund recorded Its worst performance to date as 2022 proves to be a difficult year for multi-asset funds. This has resulted in the fund returning a year-to-date performance of (-17.3%) USD and (-18.3%) GBP.
- Both the equity and bond sleeves have declined this month, as the fund no longer receives the correlation benefits that previously existed between equity and bonds.
- Our overweight position to U.S equities has been one of the main detectors in the equity sleeve due to the underperformance of the S&P 500 over the last 6 months. However, the fund's equity sleeve outperformed its benchmark MSCI Global Equity Index due to the outperformance of all other equity holdings.
- All fixed Income and alternative assets produced negative returns.
- The fund continues to outperform Its peer group Index despite the fund's underweight position to UK Equities in comparison to our competitors: a market which remained reliant over the last six months. We continue to take BlackRock's lead regarding asset allocation, and we look forward to seeing how they respond to the current market
Whilst Central Banks are firefighting the flames of inflation, is a recession looming?
As inflation continues to rage through economies, both the market and consumers are left feeling the heat in June. The market experienced its worst first half of the year in 50 years, with most major indexes experiencing monumental losses. The MSCI Global Equity Index (AWCI) incurred severe losses (-8.4%) in June. The S&P 500 and NASDAQ continued to trade in a bear market with no sign of relief, whilst the bond market Global bond market Index Aggregate Index ( -1.5%) continued to fall markets began to price in future hikes.
In June, pressure mounted on the Fed to tame soaring inflation as inflationary levels hit a 40-year high of 8.9%. They responded with a 75bp hike mid-month, exceeding analyst projection by 25bps. This was the largest rate hike in 28 years, reinforcing the Fed's Hawkish tone towards inflation. However, numerous financial experts have expressed concerns, fearing that the Fed will overtighten, which Is more likely to push the economy into a recession rather than achieve the 'soft landing' they set out to accomplish.
However, economic data released at the end of the month suggests that the Fed's plan to slow economic growth may be starting to have an effect as retail, housing, and manufacturing sales decreased. The S&P Global Flash U.S. Services PMI fell from 53.4 to 51.6 in June, demonstrating the slowing of output by service providers, while the S&P Global Flash U.S. Manufacturing PMI tumbled 4.6 points to 52.4 in June as production declined.
The U.S housing market declined for the third consecutive month, falling 3.4% to a seasonally adjusted rate of 5.41 million new house sales in May, the lowest level since June 2020 as shown in the chart below. This decline is thought to be a direct result of the cost-of-living crisis paired with rising interest rates. Although analysts expect to see this trend continue, they have stated that it is unlikely we will see a repeat of the 2008 collapse in U.S housing market which lead to the global financial crisis.
The U.S economic outlook worsened towards the end of the month following the release of the consumer sentiment report by the University of Michigan. The report showed that consumer confidence levels hit the lowest level in four decades, falling to 50.0 in June, dropping below the levels observed during the Global Financial Crisis and 9/11.
The cost-of-living crisis continues to cripple the UK economy as consumers have been squeezed by the rise in food and fuel prices. With inflation rising 9.1% in June, the UK flash composite PMI index remained at a 13-year record low at 53.1, as demand for goods drops. Recent data from Lloyds boss Charlie Nunn highlighted the stress on UK households, he said that “80% of individuals and UK customers and families have less than £500 worth of savings in their current account and their savings account.”
June, the continued restriction on gas supply to Europe has exasperated fears of shortages in the coming months which has heavily on the economy. Several countries in the European Union have taken measures to decrease the chance of shortages in the winter months.
Germany has moved to the second alarm stage of its emergency plan to reduce gas consumption which includes placing more pressure on networks to balance out disruptions whilst emphasising the need to find alternative gas sources. Sweden and Denmark are expected to take action with similar approaches.
Pressure on Russia continues in June as G7 placed a new set of sanctions on the county and its leader pledging to stand with Ukraine for "as long as it takes". The new sanctions aim to inhibit Russia's ability to export technologies for its arms industry, implement higher tariffs, and place sanctions on human rights abuses.
At the beginning of the month, ECB stopped the asset buyback programme and turned their efforts to combat sky-high Inflation. This resulted in a 25bp hike In June, with murmurs growing amongst ECB members of a 50bp hike in July. They also revised their economic outlook for growth and increased inflation projections for the year. They now predict inflation rising to 6.8% for the year and for economic growth to drop to 2.8%.
BoJ remained dovish in its views surrounding monetary tightening in June. Their stance remains unchanged as economic activity continues at below pre-pandemic levels. However, new CPI data released at the end of June could suggest sentiment may change in the coming months as the consumer price index reported came in at 2.1%, succeeding the BoJ 2% target. The deterioration in manufacturing sentiment could also prompt action from the BoJ as supply chain challenges caused by the re-emergence of covid in China and inflation begin to infiltrate large manufacturers.
In June, the Yen fell to Its weakest level in 20 years. The fall in value is mainly attributed to the contrast between ultra-high interest rates in the U.S compared to Japan, as well as the slower economic recovery experienced by Japan in the post-pandemic market compared to its developed market counterparts.
China made a slight recovery In June as they continued to lift restrictions over the month. The manufacturing PMI and non-manufacturing PMI increased over the month as economic activity grew. Industrial firms showed Improvements month-on-month as profits fell to 6.5% in May compared to 8.5% In April, a promising sign after a challenging first half of the year.