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11 April 2022

Market Round-Up

The Sri Lankan Rupee is down 32% year to date, plummeting to a record low in which it has become the world’s most poorly performing currency. Sri Lanka has been in an economic crisis for some time, characterised by economic mismanagement, spiralling external debt, depleting foreign exchange reserves and rising consumer prices. In order to fund its public services, the Sri Lankan Government has borrowed vast sums of money from foreign lenders over the past decade. The country’s requirement for funding was exacerbated by a series of both natural disasters and man-made catastrophes including heavy monsoons, the 2019 Easter bombings which killed hundreds of people at churches and hotels and, not to mention, the COVID-19 pandemic. Facing a massive deficit under President Gotabaya Rajapaksa, the Government of Sri Lanka made large tax cuts in an attempt to stimulate the economy. This strategy, however, backfired and instead hit government revenue causing budget deficits to soar further. The Central Bank then began printing money in record amounts despite warnings from the International Monetary Fund (IMF) that such an approach would lead to an economic implosion and instead suggested to hike interest rates and raise taxes while cutting government spending.

An inability to comply with the IMF’s advice led to rating agencies downgrading Sri Lanka to near default levels, with the country losing access to overseas markets. As a result, the Government resorted to using its foreign exchange reserves to pay off its debt, depleting its reserves from US$6.9bn in 2018 to US$2.2bn today. Prices of imports of fuel and other essentials, therefore, rocketed. In an effort to qualify for a loan from the IMF by effectively devaluing the Sri Lankan Rupee and therefore encourage remittances, the Government made the decision to float the currency, plunging the Rupee against the US Dollar. Consequently, the lives of ordinary Sri Lankans have only been made worse. With a looming US$1bn sovereign Dollar bond repayment due on 25th July 2022, widespread protests over food and power shortages and an economic emergency involving runaway inflation, it was perhaps no surprise that the country’s entire cabinet quit over the weekend of 2-3 April. This was shortly after followed by the resignation of Rajapaksa’s new finance minister just 24 hours into the job. This forced Rajapaksa to revoke the emergency rule just days after its implementation, raising concerns over Sri Lanka’s ability to secure help from the IMF who estimated in late February that the country had only about a month’s worth of foreign reserves left. The chances that the Government will need to resort to a sovereign default are increasingly elevating.

With the ongoing global shortage of semiconductors impeding motor factory output, new car sales in the UK fell to their lowest level since 1998 in March – the month which normally accounts for one in five vehicles sold in Britain. This comes as underlying demand for new and used vehicles remains stable despite industry headwinds and external factors affecting confidence, bolstering the supply shortage. According to the Society of Motor Manufacturers and Traders (SMMT), March registrations were down 14% on a year earlier, falling to 243,479 which they have said to be massively disappointing for the industry. Car makers have been hit by continuous supply chain blows since the beginning of the pandemic, including the global shortage of chips and more recent problems given the difficulty sourcing parts from Ukraine. Some consumers have been left waiting up to a year for new models as chip shortages have forced production cuts.

The used car market has also been hit by the global semiconductor shortage in which Auto Trader, which runs the UK’s largest online marketplace, estimates that one in five used cars that are under a year old are being sold for more than their new counterparts. Although the industry’s supply side shortages are currently worrying, there are warnings that demand may also decline as the cost-of-living rises, suggesting car makers are yet to see further sales declines. Despite there being an overall decline in sales, however, the popularity of electric cars did not falter with 39,315 battery cars being sold. This was 16% of all new model sales and more electric car sales than during the whole of 2019, which was the last year before new European CO2 targets forced most manufacturers to embrace the technology for the first time. Going forward, carmakers will work with the limited supply and focus on diverting the chips that they can secure into electric models in order to meet the new CO2 emission rules in the UK.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.
 
Market Round-Up
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