July has been a fairly strong month for global markets, despite soaring temperatures in many parts of the world. The effects of climate change become more apparent every summer, impacting production and growth across multiple industries.
On a more positive note, inflation figures have continued to improve, and interest rates appear to be approaching a peak. The cost of living crisis is still ongoing, but we are starting to see optimistic signs.
How Climate Impacts the Economy
While it may not be apparent in many parts of the UK, much of Europe (and elsewhere in the world) has been in the grip of a heatwave this summer. Greece has been particularly affected, with tourists evacuated due to wildfires.
Record breaking heat is becoming more common every year and average temperatures have risen by over 1.1C since before mass industrialisation.
At the extremes, high temperatures pose a threat to life. But even sustained periods of above average heat can have an impact on the economy. Crop harvests, and therefore food production can suffer. Industries such as construction, transport, and manufacturing can grind to a halt as workers are unable to operate in extreme conditions. Emergency and medical services can also be affected, as well as facing an increased demand.
Despite the risks (and soaring costs), the tourism industry is thriving. Airlines British Airways, KLM, and United have all reported a significant increase in revenue from flights to tourist destinations. Even in the midst of a cost-of-living crisis, those who have money to spend are prioritising leisure and luxury spending.
Global powers have still not reached an agreement about how to tackle climate change. Many members of the G20 (collectively responsible for around 80% of global emissions) have moved to reduce the use of fossil fuels, but countries such as Saudi Arabia, China, and Russia have consistently opposed this, with no further progress made during the recent talks in India.
Will This Lead to More Sustainable Investing?
Considering the clear impact of climate change, the need to live, work, and do business more sustainably has never been more apparent. But the appetite for sustainable investing has waned despite a booming couple of years during the pandemic.
Companies favoured by sustainable funds tend to be ‘growth’ oriented, which means that they reinvest their profits and often rely heavily on borrowing. Share prices can be based on future growth potential rather than current viability. Companies of this type have seen significant volatility due to high inflation and rising interest rates. This, as well as missing out on oil and gas price surges, means that many sustainable funds have underperformed compared to wider benchmarks.
While many sustainable funds have yet to recover from the volatility of 2022, Morningstar reports that these funds are still seeing healthy levels of new investment. This indicates that there is still significant interest in sustainable investing. The market is developing all the time, with moves made to tackle ‘ and open up more opportunities for investors to diversify their holdings. Sustainable funds might not have another year like 2021, but there is still a great deal of potential.
Inflation and the Property Market
The Consumer Price Index (CPI) has increased by 7.3% in the 12 months to June, which is a significant improvement from its peak of 11% last October.
Given this improvement, it has been speculated that interest rates are almost at their peak, and that any further rise in the base rate will be lower than expected.
This has already filtered through to the mortgage market, with several top ten lenders reducing their rates. When rates were rising quickly in the earlier part of the year, borrowers sought out longer fixed deals to try and keep their costs under control. Now that rates are stabilising, and there are some better deals to be found, more borrowers are looking for shorter-term fixed or variable rates.
Of course, the rapid rise in mortgage rates has not gone unnoticed in the property market. Many buyers have had to reduce offers or pull out of deals altogether due to rising costs. The buy-to-let market has been particularly affected, as rising costs and taxation mean that many landlords are looking for an exit.
The UK Market
The UK market has lagged behind in recent months, with higher-than-average inflation, trailing productivity, and a lack of interest from overseas or institutional investors. However, it has pulled ahead in July, with both the FTSE 100 and the All Companies sector returning close to 3% for the month.
Top UK performers this month include the Ocado Group, law firm DWF Group, and currency producer De La Rue.
The lowest performers include electric vehicle charging company Pod Point, Vanquis Banking Group, and OSB Group.
The Global Outlook
The European, North American, and Asia Pacific sectors have all produced healthy performance in July, with returns of between 2% and 2.5%.
Europe faces considerable challenges ahead, with a changing climate, growing refugee crisis, rise of several far-right political parties, and consideration of Ukraine’s entry into the EU (and the potential complications this will bring).
The US continues to experience strong growth, despite aggressive interest rate increases by the Fed. Inflation is now sitting at a manageable 3%, unemployment is low, and consumer confidence is high.
China has expressed a need to boost consumer spending, deal with unemployment, and support the struggling property sector. However, recent government announcements have been light on details, leaving investors uncertain of next steps.
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 02/08/2023.
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