Investment market update: August 2023

Globally, signs suggest the pace of inflation is slowing. However, businesses in some sectors are struggling and weighing on economies. Read on to discover some of the factors that affected investment markets in August 2023.

According to a Purchasing Managers’ Index (PMI) from JP Morgan, reports indicated that manufacturing in Asia, Europe and the US is contracting. New orders declined for the 13th consecutive month, which could have medium-term consequences for investment markets.

When reviewing your investments, remember to take a long-term view. Volatility is part of investing and, usually, sticking to your long-term strategy makes sense, rather than reacting to short-term movements.

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UK

The UK economy beat forecasts to post growth of 0.2% between April and June 2023 to avoid stagnation.

Yet, some institutions, including consulting firm RSM UK, warn the UK could still slip into a recession next year. This concern is compounded by PMI data showing contraction in the manufacturing sector.

While slowing, the rate of inflation remains stubbornly high. It was 6.8% in the 12 months to July 2023.

Bank of England (BoE) governor Andrew Bailey said he expects inflation to fall to 5% in October. However, he added that high interest rates are likely to remain for at least two years.

The inflation figures led to the BoE increasing its base interest rate again. As of August 2023, it is 5.25% – a 15-year high.

The decision was met with criticism. Think tank IPPR warned the central bank was “tightening the screws too much, given the UK economy is weakening, the labour market is slow, and productivity is falling”.

The rising interest rates are placing particular pressure on mortgage holders.

At the start of the month, the interest rate of an average two-year fixed mortgage deal exceeded 6.5%, although rates started to fall by the end of August.

Unsurprisingly, rising interest rates have led to house prices falling. According to Nationwide, property prices fell by 3.8% in July 2023 when compared to a year earlier.

UK Finance also reported 7% more homeowners are now behind on their mortgage repayments when compared to the first quarter of 2023. The figures suggest landlords are struggling the most – the number of buy-to-let mortgages in arrears jumped by 28%.

As a result, house prices could fall further. Estate agent Knight Frank predicts prices will fall by 5% this year.

Demonstrating the difficulties businesses are facing too, beloved high street store Wilko fell into administration after rescue talks failed. It places more than 12,000 jobs at risk across the UK.

Europe

The eurozone is facing similar challenges to the UK.

PMI data shows manufacturing firms have cut prices at the quickest pace since 2009. In addition, new orders, employment, and production all fell in July at a faster pace than the previous month.

As the largest economy in Europe, Germany is often viewed as the stalwart of the eurozone economy. Yet research group Sentix warned the country is “becoming the sick man of Europe and is weighing heavily on the region”.

Findings from the Ifo Institute support this warning. A report suggests the number of German construction firms in financial difficulty doubled in July when compared to a month earlier. In addition, 19% of companies reported cancelled orders, against a long-run average of 3.1%, which could signal medium-term challenges.

There was some positive news for the eurozone economy – in June it boasted a large trade surplus.

According to Eurostat, sharply falling imports from Russia and China led to a trade surplus of €23 billion (£19.7 billion) in June. Just a year earlier the economic region recorded a trade deficit of €27.1 billion (£18 billion).

Early in August, the decision to impose a windfall tax on banks in Italy led to stocks tumbling before the government watered down the announcement.

Facing accusations that banks were reaping billions of euros in extra profits thanks to rising interest rates, the Italian government approved a 40% windfall tax on the profits of banks.

Analysts estimated the tax could mean banks would collectively have handed over more than €9 billion (£7.7 billion). The news sent bank shares tumbling – Intesa Sanpaolo, which is the largest bank in Italy, saw shares fall by 8.7%.

As stock values fell, the government backtracked and said lenders would pay no more than 0.1% of their assets in tax, which analysts estimate will be just a fifth of the sum initially forecast.

US

In an unexpected decision, credit rating agency Fitch downgraded US debt due to “erosion of governance”.

It led to all major US stock markets opening in the red after the announcement. The Nasdaq recorded the largest fall and was down by 1.86%.

The downgrade also had a knock-on effect on European shares. The FTSE 100 fell by 1.7%, and markets in Germany, Italy and France were similarly affected.

While lower than other economies, inflation accelerated in the 12 months to July to 3.2%. To stabilise prices, the US central bank hiked interest rates to 5.5% – the highest level in 22 years.

Data could indicate that business optimism is waning. Figures from the Bureau of Labor Statistics show firms added 187,000 jobs to the economy, which fell short of expectations. In 2022, the average monthly gain was 400,000.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.