Neil Birrell
Chief Investment Officer
For information purposes only. Any views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Investing involves risk. The value of an investment can go down as well as up which means that you could get back less than you originally invested when you come to sell your investment. The value of your investment might not keep up with any rise in the cost of living.
Premier Miton is unable to provide investment, tax or financial planning advice. We recommend that you discuss any investment decisions with a financial adviser.
June – in brief
- There is a clear risk of a sharp slowdown in economic activity in the UK
- The US economy remains strong, despite the challenges
- Smaller UK companies have fared worse than larger companies
Same old topics of conversation
It was almost inevitable that the talking points through June were inflation and interest rates. There is a divergence of interest rate policy taking place between the US, EU and UK, driven by the inflation dynamics in each of the regions. In the US, inflation is moderating and a 0.25% increase in interest rates was accompanied by hope that we may be at, or very near, the peak of the interest rate cycle. In the EU, there was also a 0.25% interest rate increase, however, with inflation remaining more robust, further increases are expected. The UK, however, was a different story. The Bank of England (BoE) felt the need to put up the base rate by 0.5% to 5.0% and there is a possibility it needs to go up to 6.0% in order to beat embedded inflation. This does not paint a rosy picture for the UK economy.
The action of the BoE has sparked much debate, with politicians, economists and everyone else having their say. Opinions vary from; the action was necessary in order to beat the spectre of ongoing high inflation to the view that it was totally unnecessary and a meaningful recession will ensue. However, the BoE has a very limited number of weapons to use in the battle against inflation and interest rates is a blunt one at that. There is a clear risk of a sharp slowdown in economic activity as consumers and companies feel the effect of more expensive borrowing and recession could well be the result.
The US is the largest and most important economy in the world; encouragingly, it is remaining impressively strong in the face of the economic challenges the world is enduring, which is a positive for the overall outlook everywhere and of clear benefit to its trading partners.
The same impact on financial markets
Bond markets, particularly gilts, which are bonds issued by the UK government, have struggled in the face of interest rates rising more rapidly than predicted and also expectations of what will be the peak being revised upwards. In stock markets the dominance of large companies, particularly the giant US technology and communications ones, has remained a feature. In the UK it is similar, with small companies faring worse than the larger ones, even though their businesses might be doing well.
The sun is rising again
After many years of relatively poor returns, the Japanese stock market has been one of the strongest this year and that continued in June. There are a number of reasons for this, one of which is emerging from the COVID hangover, albeit later than other regions. This has undoubtedly helped to strengthen the economy and underpin company profitability, the latter of which is an important factor in driving share prices.
Rather counterintuitively, the return of inflation is of benefit in Japan. It has suffered from very low inflation or even deflation for around 30 years which does not encourage economic growth. Clearly too much inflation is bad, but for now, Japan is in a sweet spot.
Furthermore, there have been structural changes in the way companies are approaching achieving profits growth and enhancing their corporate value for the benefit of shareholders. These have been encouraged by the Tokyo Stock Exchange and are a big positive for the long term.
