After the optimism of January, and the resulting market rallies, reality has once again set in. Inflation is starting to slow, but still exceeds 10%, with energy prices remaining a huge problem for households and businesses. Interest rates have risen again, and it is unclear how far they will need to go to bring prices under control, and what this will cost in terms of economic growth. Growth has slowed in the main global markets during the latter part of February.
The Rise of the Retail Investor
Data from JP Morgan* indicates that in the last week of January 2023, 23% of stock market trades were carried out by retail investors. This is a new record, and suggests that people managing their own money are taking a significant share of the market, alongside banks and other institutional investors.
With share trading becoming more accessible to the public, it is no surprise that more people are dipping their toes into the market. There is a good chance that these figures will rise further.
Opinion is divided about this development. On the one hand, more money in the hands of retail investors could result in a more democratic market. Currently, institutional investors hold most of the power, and can influence share prices (and therefore the market as a whole) via their trades. Share prices rise and fall with demand, and a well-known institutional investor selling off a stock is a strong signal to the rest of the market.
As retail investors’ share of the market grows, so does their influence. But the average retail investor is not analysing company balance sheets or economic trends. Most investors will rely on professional advice or analysis in the financial press. In recent years, ‘meme stocks’ have caused confusion in the markets, as investors join forces through social media. Companies such as GameStop and AMC Entertainment have had their share prices artificially inflated by becoming meme stocks.
It’s possible that as this trend continues, markets will become more unpredictable as different companies fall in and out of investor favour.
*Forbes Business news article 3rd Feb 2023
The Financial Conduct Authority (FCA) has reported an increase in calls about fraud of 193% over the past five years.*
Scams are rife during times of crisis, and these last few years have posed several challenges. Fraudsters have taken advantage of public concerns such as Covid and the cost of living crisis to steal personal information, impersonate companies or authority figures, and tempt people into fake investment opportunities.
In 2021 alone, £170 million was lost to investment scams. ‘Authorised fraud,’ where scammers impersonate a known person, company, or authority figure, rose to £583 million.
The government and banks are under pressure to do more about rising cases of fraud. Many banks subscribe to a voluntary code of practice and will reimburse customers who fall victim to certain types of fraud. Social media companies are also being pushed to take their share of responsibility, as scammers use their platforms to target vulnerable consumers.
Discussions are underway for more robust regulation.
The Bond Market
Bonds faced a difficult year in 2022, with many fixed interest funds reporting losses of up to 30% during the lowest point.
This came as a shock to investors, most of whom held bonds for their stability, income yield, and diversification against equities. While these factors do apply in most market conditions, bonds are extremely sensitive to rising inflation and interest rates, both of which were key themes of 2022.
Bonds have started to pick up in early 2023, with the worst of the losses recouped for longer-term investors. According to global data provider EPFR, $19 billion has been invested into investment grade corporate bonds since the start of 2023, a record figure for this point in the year. This has been driven by rising yields and competitive prices following last year’s sell-off. There was also considerable optimism that inflation would soon be under control and that monetary policy could ease off slightly. The view was that now the turmoil of 2022 is over, bonds are now in a position to offer reasonable returns without the volatility of equities.
The UK Market
Performance in the UK market has been tilted towards larger companies this month. The FTSE 100 has returned 2% in February, while the FTSE 250, FTSE All Small, and FTSE AIM are all showing negative returns. The All Companies sector reflects this, with an averaged return of 1.5%. Despite encouraging figures in the smaller and medium sectors last month, it’s likely that cost of living pressures are now having more of an impact.
Top performers this month include events company Hyve Group and engineering business Wood Group, both following private equity bids.
Digital consultancy Kin + Carta has seen the biggest fall this month in the wake of a profit warning. Nanoco Group, 888 Holdings, and Hochschild Mining have also seen significant drops.
The Global Outlook
The North American sector has achieved a strong start to the year, with returns of 2.1% by mid month in February. However, growth has started to falter towards the end of the month, with the main indices starting to dip. This has followed a rise in Treasury yields and speculation over tighter monetary policy.
The European sector has shown similar levels of growth in February. While Europe has been impacted by the Ukraine war and energy shortages, it has also benefited significantly from the re-opening of China and an easing of the supply chain.
The Asia Pacific region has seen negative returns this month. After an optimistic re-opening following its zero-Covid policy, China is in the process of rebuilding relationships with the international community. Exports and economic growth continue to lag behind expectations.
Please don’t hesitate to contact a member of the team for more information on any of the topics covered.
The value of investments can fall as well as rise and is not guaranteed. Past performance is not a guide to future performance.
The content in this article was correct on 07/03/2023.
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