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Global markets to 2 April 2022

Mixed performance… and even some rallies

Global stock markets have delivered mixed performances, but the general investment mood has changed and there have been some modest rallies. Wall Street has been spearheading the recovery, and a number of major US indices are clawing back some of the losses suffered earlier this year.

Other regions have also benefited: in Asia, Japan’s Nikkei 225 Index surged on news that the government will introduce an additional package of stimulus measures to support the economy.

Meanwhile, the tragedy in Ukraine continues, and all evidence would now suggest that Russia made a significant error of judgement in deciding to invade. White House intelligence indicates that this is a source of growing tension between Putin and his military leadership.

On the ground, US and Ukrainian officials see no sign of a de-escalation and believe Russia is repositioning its forces away from Kyiv, possibly as part of its effort to refocus strikes on the eastern Donbas region.

The west needs to find alternatives to Russian energy supplies

Energy markets continue to be volatile against a backdrop of ongoing eastern European tensions, supply and demand issues, and rising inflationary pressures in western economies. However, as increasingly severe sanctions are slapped on Russian energy supplies, western governments are now firmly committed to sourcing alternatives from elsewhere.

Eastern Europe evidently remains a concern, but it is the continued rise in inflation that is driving costs up and affecting consumer confidence. Prices are rising faster than wages, and here in the UK, the Bank of England thinks that inflation might conceivably hit double digits later in the year.

This puts Rishi Sunak and Boris Johnson under even more pressure, with a number of critics claiming that the Chancellor’s Spring budget has done little to help those on lower wages. The combined impact of higher inflation and rising interest rates is now having a significant effect on the government’s borrowing costs: interest payments hit a new record high of £8.2 billion last month – the highest amount for a February payment since records began in April 1997.

Retail sales slip as inflation rises

February also saw retail sales slip in the UK, as consumers put the brakes on online spending: according to the Office for National Statistics, online sales fell 4.8% month-on-month, following strong growth in December and January. This slip can be attributed to several factors, but the most likely is simply that consumers are concerned about rising costs – they want to hold on to their cash savings until they have more clarity about what the future holds.

Over in the US, inflation continues to rise – it has reached a 40 year high of 7.9%. Jobless claims, on the other hand, are at their lowest since 1969. This fall can partly be attributed to the lifting of Covid-19 restrictions. These figures have led to speculation that the Federal Reserve Bank will raise interest rates by half a percentage point at its policy meeting in May. Fed Chairman Jerome Powell is doing all he can to tame inflation and has described the current job market as “tight to an unhealthy level”.

Covid is not done with us yet

While events in Eastern Europe, rising inflation and mixed stages on central bank policy continue to dominate the headlines, Omicron is still very much with us and is impacting the markets in Asia. Indeed, Covid cases are once again on the rise right across the continent, and a number of lockdowns and other restrictions have already been implemented at a regional level.

Much of the picture painted in the paragraphs above is sombre. But there is growing evidence to suggest that the stock market lows registered in early March could form the basis for a significant rally in the second half of the year – comparable to what we saw in 2020. With sovereign bond yields likely to rise further as central banks tighten their monetary policies, investors will be keen to take advantage of the recent pull-back in equity markets.

There have already been some sizeable gains since 8 March in the 11 sectors making up the US S&P 500 Index, with consumer discretionary, information technology, materials, communication services and financials leading the field. Although integrated oil & gas has registered a negative return since that date, it still beats all sectors for the year-to-date.

Some changes in our asset allocations

At a recent meeting of our Investment Committee, we decided to make a small number of changes to our asset allocations. Perhaps the most important of these decisions was to increase our weighting towards the UK.

Although owning UK equities has become less popular in recent years in the wake of Brexit, we believe that the UK now offers investors interesting opportunities in a market that is cheaper compared with the rest of the world.

The UK also has a global reputation for high standards of corporate governance, together with an array of interesting businesses outside of those within the FTSE 100 Index. Admittedly, the UK mid and small cap sectors have been less rewarding in recent times, but they could still represent an excellent entry point for long-term investors.

With inflation on the rise, an asset that will keep pace with it (or outrun it) is absolutely imperative. Real assets (such as infrastructure, specialist property and renewables) are less correlated to equity markets and can offer investors an alternative to equities and bonds with the added advantage of some attractive yields.

Uncertainty remains the watchword and is likely to remain so for some time to come. But fundamentals, remain strong, meaning that the markets will benefit from any future positive news – be it a resolution to the situation in Eastern Europe, a loosening of supply chain issues or a peak in inflation.

Peter is Investment Quorum’s Chief Investment Officer. He brings to IQ over 40 years of experience in getting client portfolios to perform outstandingly. Peter is relentlessly focused on building and honing IQ’s bespoke investment portfolios, and as a long-standing member of the Chartered Institute for Securities & Investment, his expertise is regularly sought by the investment press.

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