Consumer and business confidence deteriorates as economic outlook remains clouded

Global & UK Investment Director22 Jun 2022

The outlook for inflation and by extension interest rates once again determined market direction. Equities sold off early in the month but rallied post the release of the minutes of the latest Federal Reserve Board meeting. Investors were comforted that members of the FOMC appeared to realise the nuances around the inflation outlook and that the Fed was not stuck on autopilot. The pattern of consumption maybe changing but overall expenditure currently remains robust.

The economic outlook remains clouded. The conflict in Ukraine is ongoing and continues to put upward pressure on commodities, most notably wheat and oil. China is zealously pursuing its zero Covid policy with the obvious impact on economic growth. Chinese retail sales fell 11% in April. Elsewhere both consumer and business confidence have sharply deteriorated. Despite these headwinds, earnings expectations are holding up reasonably well. This has been interpreted negatively in some quarters as many investors believe we need to witness more significant downwards revisions for the market to bottom. Equities may remain choppy over summer until the outlook for earnings becomes clearer, but should the economy prove more resilient than the current negative consensus then the upside in some sectors and stocks could be significant. Interestingly, in the last month corporate executives in the US bought shares in their companies at the highest rate since the financial crisis.

Our faith in the resilience of the consumer was well established before the Chancellor unveiled his latest package of support. As such the economic merits of the additional help for the consumer are debatable but the political reality was clear. The case for partially funding the largesse via a windfall tax on energy companies, however, is misguided and short sighted. The UK cannot, and should not, try to compete with low tax jurisdictions such as Ireland. But rather should focus on providing a transparent and predictable fiscal regime, especially for long term capital projects where initial financial commitments are large. By introducing a windfall tax, the government has obscured the market’s price signals and, in all likelihood, exacerbated the long-term supply situation.

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