FINANCIAL ADVICE CENTRE NEWS
Your Winter Newsletter 2022
Your Adviser Discusses
Tricky times ahead in 2022
The old adage, “it’s not about timing the market, but about time in the market,” has been proven true over the years. Research shows that those who stay invested over the long run in a well- diversified portfolio will generally do better than those who try to profit from turning points in the market.
Financial markets have begun 2022 on a volatile note and we have seen some reductions in portfolio values. Broadly speaking, this is because of concerns over tighter monetary policy settings, rising interest rates and geopolitical tensions. As we speak regularly to investment partners about client portfolios, their research and outlook, we thought it would be helpful to distil the key themes that explain the recent volatility.
Our investment partners feel there is a good chance market volatility will stay elevated ahead of likely US Federal Bank policy changes in March and further uncertainty regarding China’s economic cycle. Nevertheless, they remain confident in the outlook for risky asset classes over the course of 2022.
The key themes impacting investments:
• US Federal Bank repricing should be complete by Q1/Q2 by which time investors should have digested the consequences of higher interest rates
• The prevailing “stagflation tone” should give way to a more constructive tone as we head toward Q2 (falling inflation, easing supply chain pressures, China policy support).
• This should create a window for risk assets to perform better later in the year
• Geopolitical tensions are likely to impact oil and gas markets and regional equity markets
• European gas prices are already elevated, oil prices could be influenced by OPEC supply decisions and the use of strategic stockpiles.
• Over the course of the year, risk asset markets are set to face increased headwinds as global growth slows.
As always, we continue to monitor the market and macroeconomic situations closely.
This may mean some lower market returns, weaker growth and higher inflation. Nevertheless, portfolios remain diversified to riskier asset classes and their predicted outlook remains positive over the course of 2022.
Exploring Global Equalities in a bit more depth...
What has been happening in equity markets?
Global equity market volatility has increased in recent weeks, with the US market particularly affected. The S&P 500 is down 9.2% from the all-time high it reached in January. Continental European stocks have performed better but are still down 7%. UK equities have been helped by the rotation out of growth stocks and into value sectors like financials and energy, but the FTSE 100 is only flat on the year.
What has driven the decline in stocks?
Several factors have pulled stocks lower of late:
The first is the stage of the economic cycle. Although the phase the global economy is currently in has historically been reasonable for stocks, returns on average have been lower and corrections more frequent.
The second factor is monetary policy. Most central banks have rapidly pivoted to stressing inflation risks. As such, they are steering markets to expect a faster tightening in monetary conditions.
Finally, perceived geopolitical risks have risen, with tensions between Russia and the West running high over Ukraine.
How is the Ukraine crisis affecting markets?
Russia is the world’s third-biggest producer of both wheat and oil. Prices of both commodities have soared of late, and the fear is that sanctions could tighten the supply/demand backdrop further, pushing prices higher. Ukraine is also a big wheat and corn producer. If supply were disrupted on the back of an invasion, that could also contribute to higher prices. Higher commodity prices are a tax on consumers. Sustained higher commodity prices, particularly oil, would act as a drag on economic growth and boost inflation. Central banks tend to look through oil supply shocks but given how unsuitably accommodative monetary policy currently is, they may be less willing to be patient this cycle. As such, it goes without saying that a further escalation of tensions between Russia and the West would be a headwind for equities.
Who is most impacted by the Ukraine crisis?
Besides the Ukrainians and Russians, Europe is a notable loser in the event the crisis escalates. Russia is a key trading partner for Europe. Indeed, Europe sources 35% of its natural gas from Russia. It’s not in Russia’s long-term economic interests to go too far in terms of it using natural gas as a political tool. But it’s already done so in recent months to some extent, and the risk is it may go further if the crisis escalates. That would be problematic given that European natural gas prices are already high, and inventories are low.
Is that it then for the equity bull market?
It’s impossible to know how the Ukraine crisis will play out. But overall the feeling seems to be that it will not be a gamechanger for the medium-term global economic outlook. Despite the posturing, a Russian invasion of Ukraine would not be easy and would come with a severe economic response. Looking back at past instances of military action shows that the market takes a strangely dispassionate view, confining anxiety to the direct economic impact. If the US and global economy continue to expand as expected, corporate profits should keep moving higher. Meanwhile, even with central banks hiking rates this year and inflation only moderating, interest rates will likely remain well below the rate of inflation for some time.
What is the bottom line?
Sentiment from investment partners is that equity returns will be lower this year than in the last two and 2022 will be much bumpier for equity investors than has been the case so far this bull market. That said, the odds still seem reasonably good that the market will hit new highs before the next bear market (a decline of greater than 20%) occurs. The recent fall in prices has also provided an opportunity for our investment partners to buy some preferred equities at more reasonable valuations.
If you have any questions about these factors or your portfolios and investments, please do not hesitate to get in touch to discuss.