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  • Belvedere Group

July 2022 Market Commentary

Updated: Oct 4, 2023

The month of July certainly left many scratching their heads. One of our leading indicators of GDP, the Purchasing Managers Index (PMI), continued its dangerously bearish decline while US CPI headlined at 9.1% YOY. This was followed up by a confirmation that second quarter GDP had in fact declined while 5 year inflation breakeven rose back to 2.7%.

Despite that, the S&P notched its best month in two years gaining 9.1%. While we have no doubt that a lot of recent inflows haven’t been fundamentally driven, we see any bullish momentum rapidly fading in early August, followed by more pain ahead. Irregardless, let’s see how the rest of the world did. Trade with China Shortly after China and the US discussed economic policy and the stabilisation of global supply chains, Biden considered lifting tariffs and sanctions while rolling back some of the trade levies set by former president Donald Trump, in the name of battling inflation. Considering that China is one of their largest exporters, such decisions could be made to reduce the cost of everyday merchandise, hence reducing the prices of Chinese imports in the US and increasing its affordability to consumers. Although, it is assumed that changes in tariffs will only have a marginal effect on inflation and China’s trade. From Trump's decisions in 2019 to raise tariffs, prices didn’t experience a significant surge that weakened the demand for Chinese imports, and so it is unclear as to whether Biden’s decision will be more effective. With the Chinese Tech industry expanding, companies like Tencent and Nio have caught the attention of many global investors, evidenced by strong flows in the top Chinese technology funds. Over the past decade, the tech industry in China has evolved rapidly, and in the midst of a post-pandemic recovery, given a reduction of stringent lockdown measures, economic growth and an increase in productivity with people getting back into work, many investment opportunities are available. With the backing of China policymakers to drive domestic technology advancement and innovation, this market seems very attractive for investors to look at. Like many emerging markets, Chinese technology is subject to higher volatility, however, those who can tolerate the risk, have the possibility to benefit from high returns. European energy crisis Since May, Putin has been using gas supplies as a political weapon against countries that support Ukraine in the war. So far, 12 EU countries have been affected by its cut in gas supplies already, including Germany, Poland, and Finland. Last week, Gazprom reduced natural gas flows in the Nord Stream 1 pipeline to Europe from 40% of capacity in June to 20% due to an alleged breakdown of turbines. Supplies were also nearly halted during the maintenance period last week. Germany is currently in the most concerning situation when Russia cuts energy supplies to Europe. As it has grown its reliance on Russian gas since the late 1990s, if Germany finds new alternative supplies from other nations, new pipelines to the rest of the country have to be built again, which will take at least several months to years. Thus, the German government has bailed out Uniper- one of the largest energy companies in the country, aiming to stabilise the energy industry. The result of this recent bailout is still yet to be known. However Germany unfortunately has also increased its reliance on coal and reopened its coal plants. Due to high temperatures, the shipment of coal has recently been impeded by the Rhine River's continuous reduction in water levels. These accumulating factors, which include a tight coal market in Germany, declining Rhine levels, and a Russian gas supply cut, have all left Germany in pain, adding to the already high inflationary burden on households. The soaring energy prices have caused negative multiplier effects across many industries in Europe.In any event, we expect the path for core EU inflation to be dependent on what happens with Russian gas flows, and hence energy prices. The European gas settlement price (EUR). The settlement price was at €199.32 last Friday, which was over a 384% surge YoY. The impact to European and the UK equity markets Despite the outlook for European countries being clouded by low consumer sentiments owing to record-high inflation, increased interest rates by the ECB, and a reduction in gas supplies, the Stoxx Europe 600 was up 1.28% unexpectedly, driven by financials, energy, and construction companies. Amid the Q2 reporting season, most corporations, including energy suppliers, outperformed expectations, sending individual stock prices higher in Europe, with Shell, Santander, Allfunds Group, and BP among the top performers. As oil prices continue to rise, most energy companies' revenue rises, which is reflected in their stock prices. Although stock prices have rallied this month (up 7.64% from last month), the lag effect of a potential hike in interest rates at the ECB's next meeting, as well as the reduction in gas supplies in Europe, may put a stop to this short-term optimism in the stock market. Despite these further hikes being discussed by the ECB, European policymakers are already putting new bond buying programmes in place to counteract the increase in borrowing costs that it is going to cause, thus mitigating the knock-on effects of other vulnerable governments. Likewise, the FTSE100 in the UK rose 1.06%, thanks to NatWest, which climbed 8.93% after beating analysts' revenue expectations. The outperformance was driven by mortgage growth and high-interest rates, which enhanced earnings across the sector. Despite inflation hitting a 40-year high of 9.4% in June, and food and energy bills continuing to rise, the banking group has opted to give shareholders a special dividend of 16.8p per share. As most analysts expect the Bank of England to raise the base rate by 0.25 basis points to 1.75% next month, banks with strong liquidity, such as the Natwest Group, will continue to benefit and the stock price may grow in the months ahead. On Recessions Although we, much like many others on the street, forecasted a Q2 technical recession a while back, rest assured that we feel no schadenfreude at being right. However, as unpleasant as it may be, nominal YoY GDP growth still stands at 9.9% while the unemployment rate remains steady at 3.6%. While an increase in non farm payrolls has preceded all recessions since the 1970’s, the proverbial Titanic isn’t near any icebergs yet. However, in line with the words of JP Morgan’s CFO Jeremy Baum we do see data that echoes uncertainty. While in terms of credit and credit growth, we know the average consumer remains able and willing to spend - we don’t think it's a trend invulnerable to the realities of the business cycle. As we’ve seen in recent weeks, store inventories have significantly built up while cost pressures have hit the margins of the largest retail bellwethers hard. In a combination of high profile layoffs (see Shopify etc), a terrible macroeconomic backdrop and a Fed Reserve that doesn’t look to be pivoting in the near future, we don’t think we’re anywhere near bottoming. The market seems to generally agree. Although we’re only halfway through Q2 earnings, the consensus 2023 EPS numbers for the S&P 500 have already been revised downwards. The same is true for EPS growth, as shown below. In truth, we think this recession is going to be painful. Over the last 20 years, the markets have grown accustomed to the Fed blinking and reversing course as soon as the equity markets plunge. With inflation, we don’t anticipate meaningful rate cuts until mid 2023, and only if inflation proves less sticky. In the meantime, bear market rallies provide a good opportunity for a little breathing room and the reloading of well thought out short positions. In blue is the price of the S&P with mean EPS growth having been cut significantly. Following weak earnings from large caps we expect this to be cut further. The Purchasing Managers Index (PMI), considered a leading indicator for GDP. We think the data to be less of a reversion to the mean than a warning of more pain to come. The US initial jobless claims. While it may be too early to declare a clear trend, there’s no doubt the hiring freezes/layoffs at many large companies will have significant downstream effects. While passive 401k’s provide a useful price agnostic buyer to hold up equity markets in times of high employment turmoil, any virtuous cycle on the way up is a very vicious one on the way down. Taiga, Crystal & Simon Belvedere Wealth Management


The commentary you find on this page is for information only; it is not intended as research or a recommendation suitable to your individual circumstance. Please seek financial advice from a professional before acting on investment decisions.

As is the very nature of investing, there are inherent risks, and the value of your investments will both rise and fall over time. Please do not assume that past performance will repeat itself and you must be comfortable in the knowledge that you may receive less than you originally invested.


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