Market Performance – A lousy first half
Global markets had a bad first half in 2022, although for once the FTSE 100 stood out for its relative resilience.
The first six months of 2022 were grim news for most investors. Consider what has happened since New Year festivities ended:
- The dragon of inflation, which had shown signs of life at the end of 2021, returned with vengeance. UK CPI inflation went from 5.4% in December 2021 to 9.1% in May 2022, en route to 11% plus in Q4, according to the Bank of England’s recent Monetary Policy Committee minutes. US inflation over the same period rose from 7.0% to 8.6%. The country that made deflation a way of life, Japan, joined it with a rise from 0.8% to the dizzying heights of 2.5% - above the central bank’s target, at long last.
- US and UK central banks pushed up their interest rates in a belated counterattack on inflation. The Bank of England added four increments of 0.25% in the first half of the year, but not to be outdone, the US Federal Reserve pushed through a 1.5% rise across three meetings, starting in March. A more timid European Central Bank reached the point in June where it virtually promised to start raising rates next month for the first time in eleven years.
- It was not only short-term rates that headed north. Yields on long-term bonds responded to higher inflation and central bank rate action. The yield on the US ten-year Treasury bond doubled, from 1.51% to 3.02% in six months, having almost reached 3.5% in mid-June. Ten-year UK gilt yields rose even faster, going from 0.97% to 2.27% over the six months. In this area, the Eurozone was far from calm. The German ten-year government bond switched from almost two years of negative yields (remember them?) to a yield of +1.37% on 30 June. Italian ten-year government bond yields almost tripled – from 1.19% to 3.39% across the half year. Japan, where the central bank has a yield curve control strategy, almost joined in, with ten-year yields going from 0.07% to 0.22%, close to the top end of the Bank of Japan’s 0.0%±0.25% target range.
- The unwelcome cherry on this inflationary, rate-rising cake was the Russian invasion of Ukraine on February 24. What the pundits said would be a brief campaign has turned into a war of attrition, casting a long pall over global energy markets. Brent crude finished the first half of 2022 up 41% at $110 a barrel (or, in US consumer terms, over $5 a gallon). The oil price is 57% up in Sterling terms, given that the pound has dropped 10% against the greenback since the start of the year.
Change in H1 2022
Euro Stoxx 50 (€)
MSCI Em Markets (£)
UK Bank base rate
US Fed funds rate
ECB base rate
Two-yr UK Gilt yield
Ten-yr UK Gilt yield
Two-yr US T-bond yield
Ten-yr US T-bond yield
Two-yr German Bund yield
Ten-yr German Bund yield
Brent Crude ($)
Iron Ore ($)
A few points are worth noting from this table:
- The FTSE 100 is a rare top performer among equity markets. As in Q1, that is due to its heavy exposure to once unfashionable global sectors – oil companies and miners. More domestic sectors fared less well – hence the drop of over 20% in the FTSE 250 and the corresponding 5.6% decline in the FTSE All Share (where the FTSE 100 accounts for about 82% by market value).
- Eurozone markets continued to be hard hit by the war, to which was added new concerns about the stability of the Euro’s fringe members – welcome back to the PIGS (Portugal, Italy, Greece and Spain).
- Changes in bond yields have been significant, with negative yields now almost entirely absent from a list of global government bond yields.
The first half was not a great one for most investors – Trustnet shows only seven of 57 IA (Investment Association) sectors giving positive returns*, with Commodity/Natural Resources at the top (+7.7%) followed, perhaps surprisingly, by UK Direct Property (+5.3%). At the bottom was UK Index Linked Gilts (-25.6%), a reminder that rising yields affect not only traditional fixed interest securities.
The outlook for the second half of the year is for more increases in rates from the central banks – by the end of 2022 the UK base rate may be 3% and the US, 3.5%. Beyond that apparent given there is great uncertainty. Some commentators see a peak of inflation near or present, while others worry that recession is imminent, if not already here. At least an investor entering the market today knows that in most instances they are getting a lower price than six months ago – often 20% cheaper.
If you would like to discuss your investment portfolio then please get in touch to arrange a free consultation.
Please note: Past performance is no guarantee of future returns. The value of investments and the income from them can fall as well as rise, you may not get back what you originally invested.
The information in this article is correct as of 26/07/2022.