The Cambridge Weekly – 5th September 2022

Waiting for policy action

The summer is nearing its end and with it the return of the more typical English late summer climes. It may feel as if markets have taken a hint with their 5-day downdraft until last Thursday, although most outsiders will look at last week’s media frenzy and blame the tumble on the truly intimidating outlook for energy bills during the winter heating season. However, as we lay out in this week’s August returns review, negative market sentiment has been driven more by returning fears that the US Federal Reserve (Fed) will be forced to raise rates for longer, due to much improved economic fortunes across the pond. The delicate equilibrium we wrote about last week has clearly once again been disturbed as we entered the new month.

August review, a story of two halves

After a promising start, in the end, August turned into a rough ride in capital markets. Equity markets across the world took a downturn, and bond yields rose once more, putting downward pressure on bond prices. British bonds were particularly hard hit, with the FTSE Gilts All Stocks losing 7.6% on the month. For UK investors, global stocks actually generated positive returns in sterling terms. This may come as a surprise for those watching the doom and gloom headlines, but it was almost entirely down to currency moves. Sterling had a torrid month, losing a substantial amount of its value against the US dollar, which made overseas holdings more valuable for UK investors.

Emerging Markets enjoying time in the sun

Recent sterling weakness has led to some unflattering assessments of the UK investment market. Reliance on outside investment (which has not been forthcoming for several years) and a floundering currency have invited comparisons to EMs, which tend to be at the whim of market sentiment and the global economic cycle. The same has been said of Europe, as the continent faces extreme energy supply pressures and a looming recession.