The market’s mood has been darkening in recent times. China’s tightening of its lockdown is causing concern that this will worsen the critical shortages the world is facing. Memories of the disruption caused by the first lockdowns have not yet faded, and that worry comes on top of a medley of disappointing data elsewhere.
The UK economy recorded growth of just 0.1 per cent in February, which was lower than expected (January’s growth rate was 0.8 per cent). Businesses are feeling gloomy: the most recent CBI survey has revealed falling optimism among its members at -34 per cent (down from -9 per cent in January), and new orders rising at a slower pace in the three months to April compared with January (22 per cent from 38 per cent). Firms expect the pace to slow even further in the next three months to around 6 per cent. And costs are growing at the fastest rate since July 1975.
Meanwhile, GFK’s consumer confidence survey revealed that consumer confidence is nosediving too. Retail sales fell by 1.4 per cent in March, as falling household real income encourages people to rein in their spending.
All of these patterns are likely to continue – the momentum behind inflation is nowhere near expended which means the pressure on personal budgets, and on companies’ costs and wage bills will become more severe.
The IMF believes the UK’s GDP growth rate will be around 3.7 per cent this year, down from its previous forecast of 4.7 per cent, based on our high inflation rate and the Bank of England’s tightening measures. It reckons that next year the UK will have the lowest rate of growth across all the G7 members at just 1.2 per cent.
But the IMF has downgraded elsewhere too, with the war in Ukraine a key contributing factor in those decisions. Managing director Kristalina Georgieva commented: “We know from global experience that conflict is the enemy of development and prosperity.”
With the Federal Reserve hardening its stance on the doses of medicine required, American investors are shedding their bullishness too. The American Association of Individual Investors weekly survey says fewer investors now call themselves bullish than at any time since 1992.
Is a bear market about to pounce? While we have to face the fact that crisis after crisis has become the new normal – after all there has been little respite on the macro front in the past 20 years (financial crashes, Brexit, pandemics, wars) and climate change means that’s unlikely to alter, it’s worth reminding ourselves that markets do not tend to fall because of weak GDP numbers. Even recessions (should one occur) do not always induce or predict bear markets.
Markets do, however, tend to rise and fall in line with central bank interventions. Asset manager GMO points to research by Sydney-based professor Talis Putnins – who has mapped how the Fed’s expanding and contracting balance sheet have impacted markets – to warn investors that balance sheet reversals are indeed a key macro risk. Meanwhile, interest rate hikes – a policy one Fed governor, Christopher Waller, has described as “a brute force hammer that sometimes breaks things” – can hurt growth stocks, as we’ve seen with the tech sector sell-off.
But earnings matter for valuations, too. That’s why defensive stocks can generally withstand the heat from troubled economies. The latest Dividend Monitor from Link Group shows UK companies are expected to pay out £92bn to shareholders this year, beating previous forecasts, and although a key driver so far this year has been the surging cash flow at oil and mining companies, all sectors managed to increase their underlying payouts in Q1. For the year ahead Link expects UK plc to yield 3.7 per cent.
What is worth focusing on is how your portfolio is positioned for the challenges that lie ahead. Our 40-page guide to the FTSE 350 this week scrutinises the challenges facing the UK’s biggest listed companies and how they are responding.
Finally, not all prognostications are gloomy for those able to ride out the current period. When inflationary pressures ease up, says the IMF, it expects the UK growth rate to pick up the pace and make it the fastest-growing economy of the G7 in 2025.
