Market Update 11 April 2022
The first quarter of 2022 has been carved into the history books: a quarter that saw devastating hostilities between two nations (Ukraine and Russia) and that has seen the West unite to condemn the actions of Vladimir Putin. Over the last 100+ years we have seen the stock market witness many wars around the world, yet the market has always bounced back stronger. Yet, despite the war grabbing a lot of news headlines, it is just one factor affecting global stock markets. Commodity prices have soared with the price of a barrel of oil rising 33% from $80 to over $100 for the first time since 2014. Inflation is hitting new 40-year highs, putting pressure on households; we’ve seen the start of another interest rate hiking cycle from the Federal Reserve; supply chains are still under pressure; and let’s not forget the coronavirus that appears to be spreading like wildfire once again, although – thankfully – a lot less severely due to successful vaccination programmes worldwide.
Q1 2022 was the worst quarter for stocks and fixed income assets since Q1 2020 when the world went into its first COVID lockdown. Only two asset classes (commodities and infrastructure) out of thirteen posted a positive return for the quarter.
For the first time since 2011, London’s FTSE 100 outpaced other global stock indices over a quarter, buoyed by its international diversification and exposure to energy companies, mining companies and banks that have gained from surging oil and commodity prices and rising interest rates. London’s blue-chip equity gauge added 2.88% between January and March: the only developed market recording a positive return for the quarter, and drastically outperforming its younger brother (FTSE 250) which recorded a -9.46% quarterly return. By market capitalization, large-cap stocks outperformed small-cap stocks, which was to be expected given the geopolitical uncertainty and rising interest rates. What’s surprising for a lot of investors is the performance of UK gilts over the quarter. Despite the textbook attraction of a “risk-free return” from Government bonds, gilts fell over 11%, their worst quarterly return in almost 50 years.
Across the Atlantic in the US, it was a volatile quarter. At its bottom, the S&P 500 index was down over 10% by late February; however, thanks to a strong recovery, in March the US market ended the quarter down just -1.97%. The rotation out of ‘growth’ into ‘value’ continued with the MSCI North American Value sector outperforming its growth counterpart by 7.72% over the quarter. Russia’s invasion of Ukraine drew widespread condemnation and elicited a range of strict sanctions from the US and its allies. Assets of the Russian central bank were frozen, while coordinated steps were taken with numerous allies seeking to deny Russia access to the global financial system, resulting in the Moscow Stock Exchange closing for over 30 days. The invasion amplified existing concerns over inflation pressures, particularly through food and energy, although US economic data otherwise remained stable. The US unemployment rate dropped from 3.8% in February to 3.6% in March. The annual US inflation rate hit 7.9% in February. The Federal Reserve raised interest rates by 0.25%, with calls from within for more aggressive tightening. Further hikes are expected through the rest of 2022.
Eurozone shares fell sharply in the quarter. The region has close economic ties with Ukraine and Russia, particularly when it comes to reliance on Russian oil and gas. The invasion led to a spike in energy prices and caused some fears about security of supply. The European market shed 8.25% over the quarter.
Emerging market equities were firmly down in Q1 as geopolitical tensions took centre stage following Russia’s full-scale invasion of Ukraine. The MSCI emerging market index fell 4.30% over the quarter. Commodity prices moved higher in response to the war, raising concerns over the impact on inflation, policy tightening and the outlook for growth. China lagged by a wide margin, falling over 11% as new cases of COVID-19 spiked over the quarter, and lockdowns were imposed in several cities, including Shanghai. After weakness in January and February, the Japanese stock market rose in March to end the first quarter just slightly below its end 2021 level.
As we move forward into the second quarter, a lot of the risks mentioned above have yet to subside. Market volatility will come, and market volatility will go; but the positive long-term outlook for markets remains. We take an active approach to ensure that portfolios remain well-balanced to weather short-term volatility, but it seems likely that we’re in for a choppy 2022. We remain committed to stewarding your capital over the short, medium, and longer term and remain confident in the medium- to long-term outlook for markets.
Tom Hopkins, MCSI, IMC
Portfolio Manager