View from the investment desk: Our take on markets as energy prices rise

August is often perceived to be a quieter time of the year for investors, but this month we’ve already seen plenty of new data on the health of the UK economy. This included a fresh policy update from the Bank of England, the latest economic growth figures, a further rise in inflation, and a rise in the energy price cap. So, what does this mean for investors?

The Bank’s Monetary Policy Committee (or MPC) hiked interest rates by 0.5% to 1.75% at its latest meeting, while at the same time policy makers have forecasted the UK to enter a recession starting in the last three months of this year with a total downturn expected between -1.5% to -2.25%.

June’s GDP showed the UK economy contracted 0.6% month-on-month as a result of two notable events: the Platinum Jubilee bank holidays and the withdrawal of Covid-19 support measures in the healthcare system.

Still, recreational spending – on things such as theatres and sports centres – grew over the month, as did spending in restaurants and other eateries. This could be a sign that the post-Covid economic recovery may still have some legs for the time being.

Economists in the City and on Wall Street have now joined the Bank of England in forecasting a recession, starting in the fourth quarter of this year, but with a total fall in economic activity of approximately -0.5%.

It’s worth noting that, in the historical context of recessions in the UK, this predicted contraction is relatively minor compared to past downturns, including the Covid-related recession of 2020. The contraction is being driven by supply side issues from delivery and availability of materials and components, not by a fall in orders.

Businesses are also highlighting the availability of skilled labour as a factor that is inhibiting output, which in turn is positive for wage growth.

To cap things off, we also received confirmation that the cost-of-living crisis isn’t abating with inflation in the UK running at 10.1% year-on-year. It comes as little surprise and comfort that energy and food inflation are the principal drivers behind this with little respite expected heading into year-end as prices are set to rise significantly – Ofgem has confirmed an 80% rise in the price cap to £3,549 for a typical household.

With inflation continuing to remain well above the Bank of England’s target of 2%, the tightening policy will continue with markets now expecting the MPC to hike rates to as high as 4% in the first half of 2023.

So, how does this impact our view on the markets, especially the UK? We remain optimistic about the post-Covid reopening story, particularly around the labour market. However, we acknowledge the headlines being made in energy markets arising from the Russia/Ukraine conflict, remain an issue contributing to our neutral view on equities.

We will be keeping a close eye on the ongoing earnings season and other factors which could move markets in the near term and will act appropriately in keeping portfolios in line with their risk levels.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance.