Equity Perspectives

Hello there and welcome to this, our third quarter Equity Perspectives. Maybe just recapping on where we've come through the summer, it's all been about inflation. Inflation has been driven principally by energy costs, fuel, gas for our homes, and petrol for our cars. But also the effects of that raw material into produced goods and also then into food, fertiliser. It's been a very challenging period. Inflation really almost into double digits in most markets now and higher in some areas of the world. And that's been very difficult to control. Governments, really, the principal tool is all about interest rates. And really what happens there is you're trying to reduce aggregate demand by really soaking cash out of the economy, by raising interest rates. It's quite a blunt tool and it really has some dynamic effects in terms of other areas of spending throughout the economy.

So, equity markets initially through the early part of the summer took this very negatively, really not understanding how high interest rates may actually peak. We saw, though, in June, July, a bit of relief, I suppose a relief rally almost in terms of equity prices, really on the effects of maybe early signs of the US inflation peaking. But we've seen this subsequent to that really the Fed reiterating that it will do everything it can to reduce inflation and therefore expectations for interest rates still remaining very high. That's led to some soft pricing again into August. But we're actually seeing companies being fairly resilient in all this. We had very positive results in the middle of the year for second quarter and first half results. And really, we're still trying to understand quite how this dynamic affects a lot of companies into the second half of this year and into 2023.

So, looking forward, what are we expecting over the coming quarter and into the rest of the year? Really a lot more intervention, I think, from governments. As we saw with COVID, it seems to be the response these days of crises to reduce those energy prices, particularly for consumers. I think companies are less likely to have help in this area. We're also likely to, I think, begin to anticipate the peak of rates, maybe dollar strength, on the back of that very strong interest rate cycle we're seeing in the US peaking, as well. I think these will give some relief to markets, but ultimately we're really trying to track where earnings are going. The consensus is there's likely to be a fairly deep recession, I think, in Europe, maybe a softer landing or small recession in the US. But I think getting some clarity over those and the effects on corporate earnings is critical for stock markets.

So, within our third quarter Equity Perspectives we have more great articles from our investment teams. We start with the US market. Jeremiah Buckley talking about how the setback in share prices is creating some new opportunities to invest. Then we got an article from the EM Team, the emerging markets, reminding us again how innovation is so important to investment opportunities. We've also got John Bennett in our European markets looking at the energy crisis, very topical clearly, and really the effects on companies and governments. And finally, we've got an article on health care. This has been a very defensive sector during the market setback, but that's allowed some areas of value to creep in, particularly in the biotech space. So again, reminding us of looking at innovation for future investment opportunities.