Market Commentary June 2022

Aetas Wealth

The war in Ukraine, worries about food supplies, worries about the global economy… May was another month where all the themes we have become used to were to the fore.

Despite this, it was a reasonable month for the stock markets we report on in the Bulletin. China led the way with a gain of 5% as Covid restrictions were finally eased in Shanghai. Unsurprisingly, perhaps, the worst performer was the Moscow stock market, which fell by 4%.

The month started with suggestions of a coup in Russia and ‘disgruntled generals’ looking to ‘oust Putin’. By the end of the month, the Russian President was still in office, although rumours continued to circulate about the state of his health.

The war in Ukraine shifted east to the Donbas region, with the National Institute for Economic and Social Research forecasting that it will wipe $1.5tn (£1.19tn) off the global economy. Every bit as importantly, the war is likely to cause a global food shortage, with estimates of 20-25m metric tonnes of grain being blocked in the port of Odessa. The price of spring wheat hit a 14-year high as worries about the war combined with delayed planting in the Northern US and Canada and severe weather in India.

The World Bank, meanwhile, warned of a global recession, while the International Monetary Fund told governments that they should subsidise food and energy costs. Chinese leader Xi Jinping told Europe to promote Russia/Ukraine peace talks and North Korean leader Kim Jong-un celebrated Joe Biden’s visit to Japan by launching three ballistic missiles.

As always, let’s look at all the main stories in more detail.

May brought the usual mixture of good and bad news for the UK economy, and nowhere was this more clearly demonstrated than on the nation’s high streets. Heineken began the month by creating 700 new pub jobs, and recruiters said that they were in ‘overdrive’, with over 1.8m job vacancies.

Against that, City AM reported that planned redundancies were up by more than 60% and convenience store chain McColl’s had to be rescued by Morrisons. At the end of the month, fashion retailer Missguided went into administration, subsequently being bought for £20m by the House of Fraser/Sports Direct group.

Marks and Spencer warned that an online sales tax would ‘damage the high street’, although perhaps not quite as much as M&S’s mooted plans to shift from town centre stores to online sales and out-of-town shopping.

Away from the high street, the month’s dominant theme was inflation and the continuing cost of living crisis. The month began with calls for a windfall tax as BP’s profits for the first three months of the year more than doubled to £4.9bn.

With newspaper headlines calling on Chancellor Rishi Sunak to ‘save us from the £100 tank of petrol’, Sunak – now included in the Sunday Times Rich List with his wife – finally introduced a raft of measures designed to cushion the blow.

Will they have the desired effect? With the energy price cap due to rise again in October and inflation jumping to 9% in April, there must be doubts. In a bid to keep a lid on inflation, the Bank of England raised interest rates by 0.25% to 1%. As City AM gloomily pointed out, this will see UK households ‘paying an extra £858m in interest.’

The worry, of course, is that rising prices and interest rates are going to hit spending and ultimately push the economy into recession. ‘Brits cut back on pints and petrol’ said one headline. ‘Brits hold back on buying sofas and fridges’ claimed another. Unsurprisingly, consumer confidence is now at its lowest level since researcher GfK started tracking the numbers in 1974. And the mood wasn’t helped when Andrew Bailey, Governor of the Bank of England, issued an ‘apocalyptic’ warning on food prices.

Let us cast around for some good news to finish this section of the Bulletin. Airbus announced that it would invest £100m to create 500 new jobs at its Broughton manufacturing plant, car dealership profits are up thanks to a post-Covid rise in demand and figures from the Office for National Statistics showed that the number of UK workers on payrolls rose by 121,000 between March and April, with the jobless rate at 3.7% – the lowest since 1974.

The FTSE-100 index of leading shares took the month’s bad news in its stride and managed a modest rise of 1% to 7,608. The pound ended the month trading at $1.2626, unchanged in percentage terms.

At the beginning of the month, the Azov Brigade was still holding the Russians at bay in the Mariupol steelworks. By the end of the month, the focus of the continuing war had switched to the Donbas region in the east of the country which, said President Zelensky, had been “completely destroyed”.

For now, Russia appears to be making significant progress in the Donbas and at the time of writing this section, is poised to capture the key city of Severodonestsk, with the capture of the city and the wider Luhansk region being seen as Russia’s biggest victory of the war.

There now seems to be a general acceptance that the war will continue until at least autumn and quite possibly into next year. What will be left of Ukraine by then? Right wing commentators in the US are starting to suggest that continuing aid to Ukraine is doing no more than prolonging the war and guaranteeing the country’s eventual destruction. It seems entirely possible that at some point the West’s appetite for aid will start to run out and President Zelensky may well come under increasing pressure to accept the loss of the Donbas.

As the fighting continues, the impact of the war continues to grow, and food shortages in many countries now seem inevitable. Understandably, though, the Ukrainians will fight on: the month ended with Eurovision Song Contest winners Kalush Orchestra selling their trophy, a crystal microphone. It raised $900,000 (£715,000) which will be spent on drones for the Ukrainian military.

The question of how to move away from Russian oil and gas dominated the news agenda in Europe. The month had begun with the bloc divided on the issue, but by the end of the month a compromise had been reached.

As things currently stand, the EU will block ‘most’ Russian oil imports by the end of 2022. The ban will affect oil that arrives by sea (around two-thirds of imports) but not pipeline oil, following opposition from Hungary. Poland and Germany have also pledged to end pipeline imports, meaning that 90% of Russian oil imports will – in theory – be blocked. Russia currently supplies 27% of the EU’s imported oil and 40% of its gas, with (according to the BBC) the EU paying Russia an estimated £340bn per year in return.

Along the way to the compromise, there were plenty of dark mutterings that too many members of the SDP – the party of new German Chancellor Olaf Scholz – were too close to Russia, and it was revealed that most leading importers have now opened rouble accounts. You will remember that this was a condition imposed by Vladimir Putin – and which was met with widespread derision when he first suggested it.

How is all this turmoil affecting Germany – still the engine which drives the Eurozone economy? GDP growth this year is expected to be around 3.8%, with unemployment fairly constant at 5%. Like all countries, Germany is facing inflationary pressures, with the rate rising to 7.9% in May from the 7.4% recorded in April.

The good news for the German economy is that despite everything it is still producing a balance of trade surplus. In May, this was €9.67bn (£8.3bn), down from €11bn (£9.36bn) in April, but still an impressive return given the problems currently affecting global trade.

For once, Europe’s two major stock markets went in opposite directions during the month. Germany’s DAX index rose 2% to end May at 14,388. The French stock market dropped back by 1%, closing the month at 6,469.

The month started with McDonald’s revealing that the closure of its Russian restaurants had cost the company $127m (£101m) in the first quarter of the year. McDonald’s and Renault will not be the last companies to suffer significant losses in Russia.

As always, the beginning of the month also brought the keenly-watched jobs news in the US. The general consensus among the experts was that the US economy would have added 391,000 jobs in April, with worries that rapidly rising prices might be forcing a slowdown. In the event, the economy did slightly better than expected, adding 428,000 jobs with unemployment holding steady at 3.6%.

It was, though, those ‘rapidly rising prices’ that were the main worry, and the Federal Reserve duly announced its biggest rate rise in 22 years, lifting its benchmark interest rate by half a percent to a range of 0.75% to 1%. This followed a smaller increase in March and further increases throughout the year seem inevitable.

Despite all the talk about rising prices, it was interesting to note some figures from the US Gaming Association. They reported that March 2022 was the best ever month for US casinos, with a take of $5.3bn (£4.2bn) in the month, beating the previous record set in July 2021. Clearly at least some American consumers still have some money to spend.

In company news, Uber was forced to reveal a loss of $5.9bn (£4.7bn) for the first quarter, which it blamed on falls in its Asian investments, specifically two ride-hailing apps, Didi in China and South East Asia’s Grab. Easily winning the Optimist of the Year award, chief executive Dara Khoosrowshahi said the results demonstrated ‘progress’.

Apple braced itself for a possible mass exodus of staff with the company ‘return to the office’ edict not having been well-received: apparently up to half of its staff are so unhappy they’re thinking of leaving. As investors sold-off tech stocks, Apple lost its position as the world’s most valuable company to Saudi Aramco.

Twitter ended the month by being fined $150m (£119m) for selling users’ data as Elon Musk’s on/off takeover of the company continued to generate more column inches than action.

Let us end this section of the Bulletin by returning to those US consumers who spent so much in the casinos. The Federal Reserve revealed that total US consumer debt in the fourth quarter of 2021 had grown to $15.6tn (£12.4tn). The figure itself is almost too big to comprehend: what is perhaps more worrying is that this represented the largest quarterly rate of increase since 2007. This was driven by a large increase in housing debt, with many experts saying there’s ‘no need to worry’. The ‘quality of borrowers’ is, apparently, much higher than it was in 2007. Whether these high-quality borrowers will be able to service their debt if interest rates continue to rise is another matter.

For all that happened in May, it was a remarkably uneventful month on US stock markets. The Dow Jones index managed a gain of just 13 points to close at 32,990 and after ending April 4,132, the S&P500 index ended May at exactly the same figure.

Far East
Perhaps the most important news in the Far East came right at the end of the month as Covid restrictions were finally relaxed in Shanghai, China’s financial hub and – as we reported last month – in terms of container throughput, the biggest port in the world. The month had started with even tighter restrictions in Shanghai, despite a decline in cases, as China continued to pursue its ‘zero Covid’ policy, which according to some sources, has seen a ‘feud erupt’ between President Xi Jinping and Premier Li Keqiang.

We have just reported on a rise in interest rates in the US. China took exactly the opposite view in May, cutting interest rates by three times the amount that had been forecast which, according to one analyst, was a clear sign that the ‘leadership has ended discussions over the property sector and decided to rescue it as soon as possible’.

Inevitably, the war in Ukraine impacted news in the Far East and as the re-opening of Shanghai contributed to oil going above $120 a barrel, so it was reported that China was in talks to buy cheap Russian oil in order to ‘replenish its strategic reserves’. You suspect that even if the EU does cut imports of Russian oil, that same oil will find plenty of buyers in Asia and the Far East.

In perhaps the least surprising news of the month, John Lee, the only candidate, was elected as the new CEO of Hong Kong. Mr Lee is the pro-Beijing security chief who crushed the recent pro-democracy movement.

The re-opening of Shanghai signalled a generally good month for Far Eastern stock markets. China’s Shanghai Composite index was the Bulletin’s best performer this month, rising 5% to close at 3,186. The markets in Hong Kong and Japan were both up by 2% at 21,415 and 27,280 respectively, while the market in South Korea was unchanged in percentage terms, dropping back just nine points to 2,686.

Emerging Markets 
For as long as the war in the Ukraine continues and – as we reported above – there now seems a general consensus that it will last for the rest of this year, Russia will command most of the headlines in this section of the Bulletin.

May saw suggestions that it would move to a rouble that was backed by gold and commodities and – in the first of what may be several similar occurrences – the Renault plant in Moscow was de facto nationalised. The longer the war goes on, the more Western companies will accept the inevitable and walk away from their Russian operations.

What of news elsewhere? There was a general election in Australia, won by the Labour party and new PM Anthony Albanese – elected with a very clear climate change agenda.

The price of oil continues to rise and this was reflected in huge profits for Saudi Aramco. The company posted its highest profits since 2019, reporting an 82% jump in profits with net income topping $39.5bn (£31.4bn) in the first quarter of the year.

As wheat prices inevitably rose, India took the decision to halt exports, and the government said that it must safeguard domestic supplies as heatwaves threatened crop yields in the country.

May was a month which brought bad news for some of the smaller emerging markets. Sri Lanka defaulted on its debt for the first time, Costa Rica declared that it was “at war” with ransomware gangs – and if you think inflation is bad here, spare a thought for Turkey. The government chief statistician quit for ‘health reasons’ after inflation officially reached 70% – although a group of scholars who have put together an unofficial alternative measure say the true rate is 157%.

The three main stock markets on which we report had mixed fortunes in the month. Russia’s stock market fell by 4% to close the month at 2,356, while the Indian market did little better, dropping 3% to 55,566. The market in Brazil went in the opposite direction, regaining some of the ground lost in April with a 3% rise to 111,351.

And Finally…
May was another good month for the ‘And Finally…’ section of the Bulletin, with three of our stories being reported on Friday 13th. As level-headed financial advisers, we draw no conclusions from that – unlike one couple in India who came to a very firm conclusion, and sued their son and his wife for ‘mental harassment’.

What form does this ‘mental harassment’ take? Sanjeev and Sadhana Prasad are suing their son and his wife of six years for not providing them with a grandchild. They are demanding compensation worth nearly £525,000, saying they spent all their savings on their son, including sending him for pilot training in the US and a ‘lavish wedding’. The son and his wife have so far declined to comment.

Long-time readers of the Bulletin will remember our comments on Uber, the ride-hailing app. Back in 2019, we were scratching our heads over how a company that had lost $3bn (£2.4bn) in the previous 12 months could be gearing up for a stock market flotation that valued the company at $100bn (£79bn), despite company bosses admitting the company ‘may never make a profit.’

Now ‘virtual land’ is making us scratch our heads even harder.

The Metaverse is, apparently, the next big thing. It will feature a game called ‘Otherside’ and May saw buyers snapping up ‘virtual land’ that will feature in the game. How much did they spend in total on land that does not exist in the real world? The small matter of $320m (£254m).

From the future to the past. With supply chain problems and the war in Ukraine pushing artificial fertiliser prices sky-high, farmers in the US have turned back the clock to rather more natural methods. Demand for manure is soaring, with prices for what’s euphemistically termed ‘solid manure’ doubling to $14 (£11.10) a ton. It has, of course, been dubbed the ‘poop boom’.

We end this month with disturbing news from China, where wealthy consumers have been forking out 11,100 yuan (around £1,300) for sun umbrellas from leading Western brands such as Adidas and Gucci. There has been an outcry on Chinese social media as the parasols don’t, apparently, keep out the rain.

£1,300 for a brolly that doesn’t keep out the rain? When they could have spent the money on 117 tons of solid manure…

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