While Andrew Bailey, Governor of the Bank of England, did his best to terrify us all with predictions of runaway inflation, a collapse in living standards and everything in between, markets did precisely what we suggest one should do and largely ignored him.
This is irresponsible scaremongering that does not help anyone. We are not flippant about the current difficult economic conditions but wish to point out that all is not lost and that there are in fact some encouraging signs that things may be improving. Here are some points that you will not see on the BBC’s Cost of Living Crisis page:
- The oil price has fallen 21% since peaking in June. A litre of unleaded petrol has fallen below the 180p mark, having briefly flirted with the dreaded £2. In a slower economy and in the face of higher prices, demand for oil waned, while producers also pumped more of the black stuff to cash in on higher prices – more supply and lower demand had begun to self-correct the oil price, long before bankers and politicians had lifted a finger. There are still grave concerns about European gas prices, particularly in Germany, as the region struggles to wean itself off Russian gas.
- Oil is not the only commodity that has peaked. From iron ore, to corn, to lumber, prices are no longer skyrocketing and in the majority of cases have been falling through the summer months. The next time that a builder gives you an eyewatering quote on the basis of higher costs, you might want to show them the door!
- Supply chains are improving: it is still much harder for global businesses to produce and ship goods across the planet on the back of factors such as China’s repeated lockdowns and a backlog of shipping that needs to be worked through the system dating back to 2020. It was encouraging to hear from Maersk that in their Q2, the cost to ship 40ft container from Shanghai to Los Angeles had dropped to -32% YoY, the lowest since start of pandemic. The positive news is that (good) businesses are doing what they have always done, adapting and getting on with things. It will not always be this hard to transport goods and in many cases there are local substitutes.
- Earnings season has not been the disaster feared: in non-financial jargon, this means that robust businesses are continuing to find ways to innovate, grow and protect pricing in current conditions. From Diageo reporting a record six months for spirits sales, to AstraZeneca delivering another year of double-digit growth in oncology drug sales, or London Stock Exchange back to business as usual after a long two years digesting their acquisition of Refinitiv, these companies are proving yet again that they are built to weather a storm. We acknowledge that the earnings outlook overall is not wonderful, but recent reports show that this does not apply to all businesses.
This list could go on, but we feel that one has probably got our point at this stage. Markets are also waking up to this reality and we have seen confidence steadily returning to asset prices since the capitulation seen at the end of June this year. From the bounce in the share prices of the US tech giants, to corporate bond spreads stabilising, to a stabilisation of sovereign bond yields despite ongoing rate rises, whisper it gently, it seems that the market has moved past the doom and gloom of the first half of 2022. Confidence will take time to rebuild, so patience will be needed. In the meantime, best enjoy the summer and forget about Mr Bailey.
The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.
Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.