​Investment Update — September 2022

The UK is set to unveil its new Prime Minister in the coming days, and the winner of the Tory leadership election will inherit an economy forecast to enter recession later this year.

With inflation running at a 40-year high and the Bank of England raising interest rates, the short-term outlook for the economy is bleak. Financial markets have taken note, with sterling suffering its biggest monthly drop since 2016, and UK government bonds enduring their worst month since 1986.

The first issue that the new Prime Minister must tackle is the energy crisis. Households and SMEs will require significant support if the UK economy is to avoid a deep recession after Ofgem approved an 80% increase in the energy price cap, taking average energy bills to £3,549 a year from October. This figure is set to exceed £5,000 in January 2023 when the price cap is next reviewed.

Despite the increasing cost of living and conceding that the UK will soon be in recession, the Bank of England are expected to continue raising interest rates in the coming months. A strong jobs market, rising wages and double-digit inflation places the Bank in an awkward position, one where they are tightening monetary policy into a slowing economy.

Economic challenges are not unique to the UK. Europe is in the eye of the storm as far as the energy crisis is concerned, and Chinese growth is being hampered by weak domestic demand and a downturn in its property market. In the US, the Federal Reserve is raising interest rates more aggressively than the Bank of England and the US housing market is already starting to show signs of strain.

Despite the lack of good news, stock markets are forward looking and much of the above has already been priced into valuations. It is hoped that inflation has peaked in the US and will soon peak in the UK and Europe. In the meantime, Europe is rapidly investing in energy security and other measures in order to escape Russia’s stranglehold over natural gas supplies.

Written by:
Charlie Lloyd
Head of Investment, Skerritt