January 2023 Investment & Economic Update

Our latest monthly investment update for January 2023 looks at how the global investment markets, economy, and commodities are performing.

The FTSE 100 index of leading UK company shares closed at the end of December at 7,451.74 points, down 136.51 points or 1.8% during the month.

The index fell by just 0.7% in 2022, with Pound Sterling losing 1.5 cents against the US Dollar.

It was a tumultuous year for UK stocks, with pressure from the war in Ukraine, post-Covid supply chain challenges, high price inflation and rising interest rates, and the additional pressures created by a disastrous mini-Budget in September.

Despite these headwinds, the FTSE 100 outperformed other major international markets in 2022. By comparison, the S&P 500 index in the US lost more than a fifth of its value over the year.

The FTSE 100’s performance was helped by its focus on energy and mining stocks, with oil giants BP and Shell each up by more than 40% in the past year.

A weaker Pound Sterling also aided the profitability of British stocks, which tend to derive much of their revenue in Dollars.

Ed Monk, associate director for personal investing at Fidelity International, commented: “UK stocks dodged the deep falls that other markets suffered in 2022, notably the US, thanks mainly to its bias towards commodities, and currency effects.

“A weaker pound made the high proportion of overseas earnings by British companies worth more in sterling terms.

“That doesn’t alter the fact, however, that the backdrop for share prices remains weak, with recession taking hold and consumers likely to feel a squeeze on their finances for some months to come.”

As London markets reopened for the year on Tuesday, stocks were off to a positive start, with investors assessing China’s reopening and waiting for the minutes from the latest US Federal Reserve policy meeting.

Recession outlook

The outlook for 2023 looks challenging with a looming economic recession and persistently high price inflation as interest rates continue to climb.

The UK’s independent Office for Budget Responsibility (OBR) forecasts a 1.4% contraction in gross domestic product (GDP) in 2023. The Bank of England is warning that the UK faces its most prolonged recession since records began, with a downturn expected to run well into next year.

Recession fears for 2023 are widespread, with the International Monetary Fund (IMF) warning that a third of the global economy will be in recession this year.

The US, EU and China are all expected to experience slowing economic growth this year due to the war in Ukraine, rising prices, higher interest rates, and the spread of Covid-19 in China.

Profit warnings

London-listed firms have issued 86 profit warnings in the third quarter, the highest number in any third quarter since the global financial crisis in 2008.

Consumer-facing companies are expected to experience difficult trading conditions, with more than half of profit warnings issued in the third quarter citing rising costs and almost a quarter due to labour market issues.

Rising interest rates increase the cost of capital for businesses, discouraging them from borrowing to invest in growth. The year ahead is likely to favour defensive sectors, including consumer staples and healthcare, although making predictions is uncertain.

Debt appetite

New research from Deloitte suggests the appetite among British companies to borrow and issue debt has been at its lowest since the global financial crisis. Their latest quarterly survey of chief financial officers found 70% rated credit as ‘costly’, with only 28% expecting their company’s demand for credit to increase in the next 12 months.

According to Deloitte’s chief economist Ian Stewart, the Bank of England’s aggressive monetary tightening is reshaping corporate attitudes to debt. He said:

“Not since the credit crunch have CFOs rated debt as being less attractive as a source of finance for their businesses than they do today. “When interest rates were at very low levels, debt finance easily eclipsed equity as a source of finance. CFOs now see them as being roughly on par.”

Despite a pessimistic outlook for credit demand, CFOs asked by the survey reported an easing perception of external risk, including inflation. On average, CFOs forecast inflation to fall to 5.8% in a year, down from a peak of 10.7% in November.

Shops closing

Last year saw a significant rise in the number of shops closing in the UK. The latest data from the Centre for Retail Research found more than 17,000 sites shut in 2022, with total closures up 50% compared to a year earlier.

More than 150,000 retail jobs were lost due to the store closures.

Joshua Bamfield, director of the Centre for Retail Research, said: “Rather than company failure, rationalisation now seems to be the main driver for closures as retailers continue to reduce their cost base at pace.”

House prices

UK house prices are forecast to experience their biggest fall since the global financial crisis.

Two-thirds of economists surveyed by The Times expect average house prices to fall by more than 4% this year, with most warning of double-digit falls.

Rising interest rates and the expected economic recession would prompt this market correction.

Sanjay Raja, chief UK economist at Deutsche Bank, said: “A double-digit price fall would not be surprising. If typical mortgage rates remain above 5 per cent, together with an unprecedented squeeze on household incomes, it is hard to see how house prices can avoid taking a significant hit in 2023.”

Global gas prices

Fears of a natural gas price are easing due to the warmer-than-expected start of the winter in large parts of the world. January weather forecasts look milder than seasonal averages in the US, Europe and China, with the latter being the world’s biggest gas importer.

Gas futures are falling due to reduced demand and a weaker outlook, with European gas briefly reaching its lowest level since the start of the war in Ukraine.

Abhishek Rohatgi, a Singapore-based analyst at BloombergNEF, said: “The risk of extreme market tightness that people were worried about before the winter started seems low now.”

Market data

On 3rd January, £1 buys $1.1921 or €1.1309. Gold is $1,812.35 an ounce, and UK natural gas futures are 179.00p/therm, down from 341.97p/therm at the start of December. The UK 10-year gilt yield was 3.535%.

Kellands will continue to keep you updated on market developments on a regular basis. However, if you have any questions or need some financial advice in the meantime, please do not hesitate to get in touch.

 

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