The problems only seem to get worse as the first half of 2022 draws to an uncomfortable close: inflation is rampant, interest rates are up, energy markets remain difficult as Putin’s bloody war grinds on, and China’s COVID policy continues to stifle supply chains… and now we have a change in Prime Minister.

UK Gilts suffered steep falls as interest rates increased for all periods, the ten-year Gilt has sunk 13% this year, taking the yield to 2.5%, while the thirty-year Gilt has suffered a 32% fall. The pattern has been the same in Europe with an extraordinary turn-around in German ten-year bonds from negative yields at the start of the year to a June peak of 1.75%.

Concerns have now turned to fears of recession; economies are slowing rapidly and aggressive tightening by central banks could easily tip them into recession. Perversely, this then takes on the feel of a self-correcting mechanism as expectations of recession act to dampen activity and inflation and limit the scope for central banks to raise their rates. Recognising this, bond yields turned down again at the end of the quarter and there are (some) early indications of a rolling-over in inflation.

It would/will be an odd sort of recession against a backdrop of robust labour markets and household and corporate balance sheets in good health. Possibly we have been overly conditioned by two dramatic (but exceptional) recessions following the Global Financial Crisis and COVID, a rather milder affair is the more likely outcome.

Unsurprisingly, equity markets have not enjoyed all this uncertainty and further falls in June left most world indices down by around 20%, though FTSE 100 remains an outlier thanks to Shell (et al). The FTSE 250 Index is down 21% and feels rather more representative at present. American markets also fell around 20% over the first half and the more technology-biased NASDAQ Index is down by around 30%. It is not yet clear that equity markets have ‘found a level’, more falls would not really be a surprise. But, it is beginning to feel as if a lot of concern has been ‘priced-in’ to the markets by now.

London’s stock market indices came down along with everything else though not as much, thanks to a few of the major companies. We have mentioned big oil before, but this quarter (and year) has also seen strong performance from the big tobacco companies, notably British American Tobacco, and HSBC has also done well. Thankfully, some of the other big, and more ‘investable’ companies such as AstraZeneca, GSK and Unilever have also helped to prop-up the leading indices.

The Balanced Equity Income Fund has suffered along with equity markets in general. With a more diversified approach, lower ‘beta’ to the equity market and no smaller companies, it has avoided the worst of the falls, but it has still been painful. The overall disposition has not moved significantly, this pie chart now separates out the property investments, see chart, right.

We saw weakness in the Mining and Materials companies, notably Rio Tinto, which fell back with metals prices, but also the packaging company D S Smith and Croda International, though it is quite hard to see many similarities between these three. Halma, 3i Group and Howden Joinery were also poor performers, loosely grouped under ‘Industrials’ there is precious little similarity here either. We added to Howden at the end of June, considering that the 35% fall in their share price was overdone. Greggs was another casualty, suffering a further 26% fall.

The Staple Goods companies provided some positive performance for us, both Unilever and Reckitt Benckiser gained around 7%. The pharmaceutical companies, AstraZeneca and GSK gained by a similar amount. The same was not true of Smith & Nephew, which slipped again. GSK are ‘spinning-off’ their consumer health side, Haleon (Panadol, Voltaren, Sensodyne et al) in the next few weeks. This was the business that Unilever tried to buy from GSK for £50 billion last year, it looks likely to have a lower value in the market. BAE Systems was a positive contributor again though, if anything, they appear to be ‘talking down’ expectations.

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