FINANCIAL ADVICE CENTRE NEWS
Your Spring Newsletter 2022
Market Overview
The first trading day of 2022 set a particularly buoyant and optimistic scene, with the FTSE 100 index pushing above the 7,500 level for the first time in almost two years and US stock markets setting yet another all-time high. Investors appeared to discard concerns over the Omicron variant of COVID-19, and jitters surrounding inflation and central bank policy were pushed down the list of worries. However, hopes of a more calm and collected start to 2022 were soon disappointed. Minutes from December’s US Federal Reserve (Fed) meeting indicated the central bank was considering raising interest rates “sooner or at a faster pace” than previously anticipated in order to tackle inflation.
Equity markets fell heavily, particularly in more ‘growth’-focused sectors, as well as parts of the fixed income universe. For growth stocks, higher inflation and rising interest rates can reduce the value of the future company earnings, profits and valuations that dictate a significant portion of their present value. For fixed income investments, a backdrop of rising interest rates can make current fixed levels of income look less attractive. All of which made for an uncomfortable environment for investors, as it became apparent the Fed would use all available options – including interest rate hikes – to get inflation back under control.
The invasion of Ukraine
The most significant event during the quarter was Russia’s unprovoked invasion of Ukraine. Russian troops had been assembling on the Ukrainian border for some time, so the invasion itself was not entirely a surprise. However, the scale and brutality of the invasion shocked markets. The Russian equity market experienced some of its worst ever falls and the Russian currency crashed to historic lows against the dollar as western nations began imposing significant (and in some cases unprecedented) sanctions. More broadly, almost all equity regions fell too, although not nearly to the extent of Russian markets.
Given Russia’s extensive involvement in oil and gas exportation, oil and energy prices soared. The decision by the US and UK to ban Russian oil imports as part of their broader economic punishment for Russia briefly sent Brent crude oil prices towards $140 a barrel before subsiding. European equities suffered the most severe impact, not least because of Europe’s proximity to the conflict, but also the reliance many European countries have on Russia for their energy imports.
The UK equity market has held up relatively well, thanks in part to high levels of exposure to commodities and energy stocks that benefitted from higher prices. US equities also proved resilient, as North America has greater energy independence than other countries and much less reliance on Russia in particular. As events progressed, markets were able to better digest the implications of the invasion. After an initial bout of volatility subsided, markets subsequently moved higher in the ended last month of the quarter.
Inflation
Away from the Ukrainian crisis, inflation was one of the biggest threats to asset prices. In the UK inflation measured by the Consumer Price Index (CPI) rose by 6.2% in the 12 months to February, marking a new 30-year high and significantly higher than the previous high of 5.5% recorded in January. This prompted the Bank of England to increase its inflation forecast, predicting a peak of 7.2% in April, up from the 6% predicted in December. In the US, annual CPI inflation jumped to 7.9% in February, with core inflation (which excludes food and energy costs) at 6.4% year-on-year.
Central banks in both the US and UK chose to raise interest rates during the quarter. The rate hike in the US was the first increase since 2018, while the UK saw the first back-to-back rate increases since 2004, with some members of the Bank’s Monetary Policy Committee pushing for even greater increases. In the Eurozone, the annual CPI inflation rate rose to a fresh record high of 5.9%. Europe has had negative interest rates for eight years, but this latest inflation number increased the likelihood of rate hikes taking place in Europe this year, which until recently had seemed an impossibility.
In the UK
In broader data, UK gross domestic product (GDP) bounced back in January, increasing by 0.8% and returning it to pre-pandemic levels. UK unemployment also fell to pre-pandemic levels in January, although it was evident wages were struggling to keep up with rising inflation. Chancellor Rishi Sunak’s Spring Statement was dubbed by critics as a “missed opportunity” to materially help struggling consumers and businesses, given the challenging inflationary backdrop. The National Insurance threshold for individuals was increased by £3k and a cut in Income Tax from 20p in the pound to 19p was pledged for 2024. Motorists were given a ‘helping hand’ as fuel duty was cut by 5p per litre.
In the US
US employment data was another relatively bright spot as non-farm payrolls rose by 678k, well above expectations of 400k, while new jobless claims fell to their lowest point since 1969. Strong jobs growth pushed the US unemployment rate down to a post-pandemic low of 3.8%.
In China
In China, the economy had made a better start to 2022 than expected, with both industrial production and retail sales growing strongly, thanks to improving car sales and demand for Olympics-related products. Despite this, Chinese equities were weak through the period. A new COVID-19 outbreak resulted in the highest number of cases since 2020, culminating in further mass lockdowns. The economic ramifications of this caused weakness across the Asia-Pacific region, and this weakness was compounded by fears China would open itself up to US sanctions if it agreed to Russian requests for military assistance in its war with Ukraine.
In Summary
The volatility and headwinds that faced asset classes in the first quarter of 2022 are almost certainly likely to continue throughout the remainder of this year. Our investment partners are hopeful that COVID-19 will continue to be a reducing risk to portfolios, and that central bank activity helps to ensure inflationary pressures subside towards the end of this year/early 2023.
A well-diversified portfolio continues to be one of the most prudent approaches to navigating these uncertain times. Our investment partners also continue to emphasise the vital role that alternative assets will play in light of the inflationary challenges facing equities and fixed income in the months ahead.