Whilst the spring weather continues to warm, plenty of financial sector issues continue to worry global investors across both equity and bond markets. Meanwhile heightened inflation levels continued to impact bank account balances, and the war in Ukraine has led to many tragedies along with heightened geopolitical, commodity and supply concerns.
It has been 60 years since the Beatles signed their first record deal. The rock group from Liverpool dominated the industry for nearly a decade – and long after that as individual performers. John Lennon, Paul McCartney, George Harrison, and Ringo Starr created timeless tunes and memorable messages that we can borrow today to portray our economic and financial market outlook.
If a week is a long time in politics, then the near five months since Rishi Sunak’s second 2021 Budget feels close to a lifetime. Back on 27 October, it looked like 2022 would be a year of recovery in which the pandemic faded in the rear-view mirror and ‘transitory’ inflation duly transited to lower levels. It has not worked out like that.
At a market level we witnessed big moves in oil markets with the US banning Russian oil imports and the UK stating that they would phase out of Russian oil by year end. At one point on Tuesday, we saw Brent Crude momentarily touch $139 a barrel before falling heavily on Wednesday and is now currently at around $112 a barrel. Prices at the petrol pumps hit all-time highs this week and this will act as a pinch to the consumer. The higher prices are in effect a windfall for the UK government given the level of fuel duties. It will be interesting to see if there are any reductions to these duties to support consumers.
Gold was once again an asset in demand this week as prices rose through $2,000 an ounce on geopolitical and inflationary fears. At times it can be a frustrating asset to hold, but we continue to see the merits in holding this real asset that offers good portfolio diversification and has returned circa 10% this calendar year.
It was not all doom and gloom in equity markets this week. On Wednesday European equities were in favour with the German equity index rising a staggering 7.9% in a day. The UK and wider global equities all participated in this relief rally too, which appeared to be driven in part by the rumours that Zelensky may be willing to agree to certain Russian demands. It’s a reminder of how quickly things can change and highlights the risk of being out of markets. Positive UK data, which showed the economy emerged strongly from the Omicron variant in January, boosted UK equities on Friday; the FTSE 250 index is now on course for its best week in a year, albeit after falling heavily last week. The strong data may encourage the Bank of England to once again raise interest rates when they meet next week.
US inflation came in at a new 40 year high of 7.9% on Thursday, which was in line with consensus. The expectation is that inflation will continue to rise in the coming months as rising oil and commodity prices feed into the data. With the US Fed also meeting next week, many are expecting to see their first interest rate rise of this current cycle.
As mentioned in the first paragraph we have been meeting with a lot of fund managers recently and will continue to over the coming weeks. There were some interesting takeaways; a global equity manager said that their portfolio was flagging the highest upside to fair-value since August 2020. A UK equity fund manager said that they had personally invested in their own fund this week, acknowledging that they didn’t know if this was the bottom, but it provided a good entry point on a medium-term time horizon. We were also reminded of the embedded inflation protection built into some of our infrastructure and real asset holdings. We will continue to carry out this exercise and focus on making sure we are partnered with talented fund managers and diversify across asset class, investment style and geography.
Andy Triggs | Head of Investments, Raymond James, Barbican
Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.
This week has seen heightened volatility across most asset classes as markets attempt to price in a prolonged Russian invasion and the associated risks this would create. As Simon Evan-Cook alluded to in yesterday’s monthly note, uncertainty is something that markets dislike, and uncertainty has increased over the last few trading days.
Safe-haven assets have generally rallied this week, albeit, with bumps along the way. At the start of the week, we witnessed significant falls in developed government bond yields (prices rise). The likely driver of this is the expectation of slower economic growth, which could deter central banks’ from raising interest rates at an aggressive pace. However, it is still likely that the US Fed will raise interest rates by 0.25% this month. Fed chair, Jay Powell, spoke to the House of Financial Services Committee and clearly showed his support for a modest interest rate rise in March to help curb inflation, while acknowledging it was too early to determine the economic impact of Russia’s invasion of Ukraine.
While government bonds and gold responded to the escalating conflict by rallying, equity markets hit more turbulent times, with big falls on Thursday and Friday (at the time of writing). French president, Macron, spoke with Putin for 90 minutes, with little success and it became clear a resolution was not close and there could be worse to come. While the sell-off has been broad-based, European equities have generally fared worse than US equities, which is a clear reversal from the trend in January and February this year.
The commodities sector looks poised to finish the week with its biggest weekly gain since the 1960’s. Brent crude oil briefly touched $119 a barrel this week, the highest level since May 2012. European and British gas prices pushed higher with the benchmark Dutch gas price hitting new all-time highs. Rising oil and gas prices will hit the consumer hard which will be a drag on economic growth and is something we need to pay attention to. Consumer balance sheets are generally robust given the ability of many to deleverage and save during COVID-induced lockdowns, however, higher energy prices could see this trend reverse. It wasn’t just oil and gas rising this week, copper hit a new all-time high while wheat prices have risen nearly 75% in 2022. Ukraine and Russia are two of the major exporters of wheat globally and their supply is likely to fall significantly.
As is customary for the first Friday of the month, US Non-Farm Payroll data was released. This is normally a key focus of the market; however, it has been left in the shadows by the geopolitical concerns. The data was very strong, showing 678,000 jobs had been added to the economy against the consensus of 400,000 and the unemployment rate fell to 3.8%. These numbers highlight the underlying strength of the US economy at present and will likely encourage the US Fed to raise rates later in March.
The backdrop of a Russia war makes it uncomfortable to be invested currently and will stir up a range of emotions for investors. While the cause of the concern is different this time, many of the emotions people are feeling will be similar to the initial COVID-19 crisis in March 2020, a period where uncertainty engulfed markets and assets sold off indiscriminately. With hindsight this was the opportune moment to actually be increasing risk. While we don’t want to take undue risks in portfolios, it can be helpful to look back to other crisis moments in history.
Andy Triggs | Head of Investments, Raymond James, Barbican
Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.
Events in Eastern Europe over the last week have correctly dominated TV, radio, newspaper and online news. It also meant that almost all equity or bond investors made losses during February, many for the second consecutive month unless – like the U.K. equity market – there was high proportional exposure to commodity sector shares.
Whilst the application of many millions of booster jabs have given a strong protection against the Omicron variant, offering the hope of COVID normalisation, global financial markets have not had a positive first few weeks of 2022.
Athletes at the Olympic Winter Games will either taste the thrill of victory or the agony of defeat. The same can be said for investors, as the easy victories over the last two years will become more challenging and hard fought in the year ahead.
Less than eight months ago, Rishi Sunak presented a Budget that was anticipating the ending of the pandemic’s impact on the UK economy. He announced extensions and end dates for the furlough scheme, the self-employed income support scheme, reduced VAT for hospitality and the £20 a week uplift to Universal Credit. To finance some of that expenditure, the Chancellor also revealed a 6% increase in corporation tax, deferred until 2023.
To understand what’s happened to a global equity index, the first place to look is always the US. American equities punch well above their weight in world stock markets: while their economy makes up less than a third of the globe’s, their companies represent double that amount in a global equity index. So they usually dictate the global tone. This week the consensus is that investors are worrying about the Federal Reserve beginning to slow the pace of stimulus. It isn’t yet overly clear why they’re worrying this week more than last, but that’s the mystery of markets for you.
If investors in U.S. equities are worried about this, then holders of British and Continental European shares are even more concerned: share prices on this side of The Pond have had an altogether soggier week. Looking at the winners and losers in the fund world, “value” funds have fared worse than “growth” funds, which implies investors are becoming less convinced that broad-based economic recovery and/or inflation are what we’re headed for.
The stand-out market this week has been Japan. For most of this year, it’s seemed as if investors had simply forgotten that Japan existed; its market has flatlined while most others raced upwards. But the recent resignation of Prime Minister Suga has jolted their memory, and talk of new leaders with new cheque books helped the Tokyo index to defy the wider gloom; it has rallied by 4% in just a week. (This is why Japanese equities form a useful part of a global portfolio – it’s good to have different parts doing different things at different times, and Japan often marches to its own tune).
Finally, we hop across the sea to China, where gaming giants Tencent and Netease were called in for another telling off from Beijing officials. Having already been on the receiving end of one share-walloping lecture earlier in the summer, they were again chided to “profoundly understand the importance and urgency of preventing minors from online game addiction.” Their shares promptly tanked again, dragging other tech giants with them, and turning what had been a mildly positive week for Asia Ex-Japan shares into a negative one.
And now a market scoop: The success of these tactics duly noted, the Evan-Cook household, which is similarly blighted by gaming-hooked minors, will henceforth move to the communist governance model. Sadly, at the time of writing, the US and Japanese markets are closed, so you’ll have to wait for next week’s report to hear how hard this hits shares in Microsoft and Nintendo.
In the meantime, have a great weekend.
Simon Evan-Cook
(On Behalf of Raymond James Barbican)
With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.