In the UK, the FTSE 100 fell almost 2% on Thursday to close out its worst month since the early days of the Covid pandemic with the index falling more than 5% over the month of June. The tech-heavy NASDAQ Composite index closed the month almost 8% down, as many growth stocks that performed well during Covid-19 have been hit this year.
Federal Reserve’s Chairman Jerome Powell stated that “we now understand how little we understand about inflation” at the European Central Bank’s Forum in Portugal on Thursday. He also specified that there “is no guarantee” that they can halt multi-decade high inflation without impacting the job market.
The 10-year US treasury yield fell below 3% this week as growing recession fears dominated economic sentiment. Treasuries retreated from their 3.5% peak in mid-June and closed below 3% for the first time in almost a month.
Market consensus continues to drift towards our view that a recession is on its way. Markets have partially discounted this scenario with valuation having retreated. Earnings expectations are likely to come under pressure, so it is important to have a core portfolio that focuses on businesses with earnings that are resilient in the face of tougher economic conditions.
As we elucidated in last weeks’ update, “whilst a recession looks likely, if not probable, it should be remembered that one year’s weakness in earnings is a small part of the valuation of companies, just as in Covid when companies lost a couple of years’ worth of profits, the long-term value is relatively unchanged”.
It is tempting to bring out a standard playbook when it comes to recessions, despite the evidence that each historical recession has interacted differently with financial assets. Given that this recession is primarily caused by inflation, we expect this difference to manifest in creating a different flavour of recession than investors may be used to. Our investment positioning has taken this into account, embedding optionality into portfolios that will help under different scenarios to enable us to capitalise on opportunities and improve long term returns.
Quote of the week
"Last week in Tesco, tin of Heinz soup 95p today £1.40 disgusting!"
Commentator - Tesco vs Heinz row
The selection of beans on Tesco’s shelves are already noticeably limited. Visitors used to a sea of Heinz Beanz cans were instead met with gaping holes on Thursday. Online, notices of “this product’s currently out of stock” floated under many of Heinz’s best-known items.
While it may seem reminiscent of pre-lockdown panic buying, this time Tesco is not racing to re-stock Heinz goods. On Wednesday, the two sides went head to head following Heinz’s decision to pause supply of its beans after a pricing dispute.
“We will not pass on unjustifiable price increases to our customers,” said Tesco, which is headed by chief executive Ken Murphy. “We’re sorry that this means some products aren’t available right now.”
Heinz countered that it was facing significant increases in commodity and production costs and wanted to provide goods at the right price “without compromising quality”.
Source: The Telegraph
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