August 15, 2022

HAMISH MCRAE: Get set for a year of two halves

HAMISH MCRAE: Will there be a better second half to the financial year? Well, it can’t be much worse than the first half, can it?

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This has been the worst first half of a year for US shares since 1970. The S&P500 was down 21 per cent by Thursday’s close, the high-tech Nasdaq index down 30 per cent, and the Dow Jones nearly 16 per cent. 

Here in the UK, the shares of big cap companies did markedly better, with the FTSE100 down only 4.5 per cent, but allow for the fall in the pound and that does not look so bright. 

And the shares of medium-sized UK companies fared much, much worse: the FTSE250 was down 22 per cent in the first half of the year. Add in the impact of inflation, which has reduced the value of everything by 5 per cent over the past six months, and the numbers look even worse. 

On the move: Will it be a year of two halves, where the second is quite different from the first?

Oh dear. As I argued here last week, the hunt is now on to find the bottom, and that usually takes one of two forms. Either there is some cathartic event that causes a sudden plunge followed by a swift rebound, or there is a gradual awareness the world economy will recover and shares are relatively good value. We are not there yet, but I do feel comforted by one thought. It is that whereas six months ago many of us, myself included, had an uneasy feeling about the months ahead – that was why I did not feel comfortable making any share predictions but suggested sticking spare savings into gold – now at least we have the bad news out in the open. 

Gold, by the way, is broadly flat in dollar terms, but up decently in sterling. At least it has been some sort of hedge against inflation, unlike Bitcoin. 

So will it be a year of two halves, where the second is quite different from the first, or are markets merely half of the way down, as US investor Michael Burry tweeted on Thursday? He predicted the 2008 housing bubble and banking crash and made a fortune for himself and his investors in the process. If you follow these things, he became famous in the 2015 movie The Big Short, where he was played by Christian Bale. He now thinks that markets will only hit bottom when people stop investing in technology stocks, cryptocurrencies and non-fungible tokens. 

I have a lot of sympathy with that back-to-basics view, but there were a couple of encouraging signs last week some sort of turning point might be not that far over the horizon. 

One came from the meeting of central bankers in Sintra, Portugal. They were really scared, as they should be. Jerome Powell, chair of the Federal Reserve, Christine Lagarde, president of the European Central Bank, and Andrew Bailey, Governor of the Bank of England, all committed themselves to pushing up interest rates to crush inflation, even if this led to recession. 

So why is this encouraging? Simply that now they have been frightened out of their complacency, the rest of us can relax a bit. The time to be worried was last year when the danger was mounting that inflation might reach double digits but they were still saying any rise would be transitory. 

Of course, the war in Ukraine has made matters worse, but the fundamental threat was already there. You don’t need to buy the full Michael Burry line to see that they were ignoring the growing bubble in tech stocks and fringe assets that had no intrinsic value. The peak in the price of Apple shares was back at the beginning of January; the peak in the price of Bitcoin was in November last year. Long before Russia invaded Ukraine. 

The second reason for modest cheer is that I think we can begin to see a turning point in inflation. The numbers now are terrible and will get worse. The eurozone is now up to 8.6 per cent inflation. 

We are even higher at 9.1 per cent on the CPI, though if you include housing costs for owner-occupiers, the so-called CPIH index is ‘only’ 7.9 per cent. The latest US number is 8.9 per cent. 

But economists in a number of private sector organisations have started to spot signs that inflation may shade back. For example, the Italian bank UniCredit notes that the price of durable goods in Europe has started to fall. The independent British forecasting group Pantheon Macroeconomics expects that after the peak this autumn, inflation will fall very fast next year and actually be below 2 per cent by the end of next year. 

Over in America, Goldman Sachs sees interest rates peaking at the end of this year as the economy slows and inflation comes down. 

So a better second half to the year? Well, it can’t be much worse than the first half, can it?

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