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Home Markets Global
Published 28 November 2022
Important information – the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
THE underlying market narrative in 2022 has not been positive, but it has been easy to understand. Rising inflation has demanded rising interest rates, which has been a negative for most financial assets. Now, at last, there is light at the end of the tunnel.
Is inflation finally abating?
With UK inflation at more than 11%, it might seem premature to think that the tide has turned. But evidence is mounting on a range of fronts that price rises will quickly return to central banks’ low single-digit targets.
Factory gate, or producer, prices are now falling fast. In Germany the most recent reading was the biggest decline recorded at over 4%. Shipping rates, too, are back at pre-pandemic levels. And commodity prices, including key input costs like oil and gas, are in retreat.
That’s great news for central banks like the Federal Reserve, which last week published minutes of its latest rate-setting meeting, pointing to a slowing of the pace of rate hikes as the battle against inflation starts to look winnable. Currently standing between 3.75 and 4%, US rates are now forecast to peak at 5% or just over in May next year.
The question then is how quickly they can return to a more neutral level of say 3-3.5%. And, more importantly, whether it will by then be too late to prevent a recession on both sides of the Atlantic. That’s likely to be the key story of 2023.
So, can shares continue to rally?
If recession is the main economic story of next year, the big market question is whether stock markets have already priced in an economic slowdown. Valuations have fallen this year. What no-one can be certain about is the other side of the market equation – earnings.
Expectations are for flat earnings, excluding still buoyant energy profits. But history suggests that in a recession earnings tend to fall by on average 13%. That would make the market’s current valuation multiple of around 17 look too ambitious. So, earnings are the key. And we are not yet out of the woods.
Meanwhile in China….
The arithmetic of Western markets is at least quite simple – inflation, interest rates and earnings forecasts. Over in China, however, things are more complicated. This week’s protests against the government’s zero Covid policy have hit sentiment hard after a recent recovery on re-opening hopes. The initial falls in early trading this week – as much as 4.5% for Chinese stocks listed in Hong Kong and nearly 3% on the mainland exchanges – were partially reversed by close of play but it remains unclear how things will pan out in the world’s biggest emerging market.
And at home….
Meanwhile, the home market is focused on, well, the homes market. The number of requests to estate agents about specific properties has slumped by 44% since September’s mini budget, according to property portal Zoopla. That reflects sharply rising mortgage rates during the recent bond market turmoil and fears that 2023 could see the recent house price surge go into reverse.
Important information – investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Funds in the property sector invest in property and land. These can be difficult to sell so you may not be able to sell/cash in this investment when you want to. There may be a delay in acting on your instructions to sell your investment. The value of property is generally a matter of a valuer’s opinion rather than fact. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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