What’s happened in markets?

FTSE All Share 0.19 3.93 4.13 1.19 14.48 7.89 5.12
Euro Stoxx 50 -0.74 3.18 3.31 -0.52 20.32 15.16 8.49
S&P 500 -0.29 0.72 5.41 -2.11 24.57 23.87 17.55
Japan Topix -0.90 0.32 -0.34 -0.74 7.82 11.48 7.46
MSCI Asia Pac. 2.42 2.37 -0.11 1.84 -8.83 12.48 10.98
MSCI Emerg. Mkts. 2.58 3.03 -0.41 2.09 -6.22 10.97 9.81
Jo’burg All Shares 1.66 5.12 12.81 1.99 22.63 15.98 10.96
UK Gov’t Bonds 0.47 -4.62 0.00 -1.64 -5.45 2.54 2.35
US Gov’t Bonds -0.17 -2.00 -1.68 -1.77 -2.86 3.48 2.62
Global Corp. Bonds -0.33 -1.92 -1.71 -1.73 -1.76 5.80 4.37
Emerg. Mkt. Local 0.90 0.76 -1.44 0.14 -7.10 2.06 3.39

Figures in the respective local currencies as at the end of trading on 14/1/2022.

The week of 10 January continued in the same tone as the year started with the focus on inflation and interest rates. In terms of economic data, the US inflation rate reached its highest level in almost 40 years with the year-on-year figure up 7%, and very much on an upward trend. We must be conscious though that a large part of this is due to base effects (where the percentage increase seems higher as it is based on a low starting figure) and supply constraints because of the pandemic. These rates will come down it is just the speed at which this will happen that’s impacting markets. The market is pricing in four interest rate rises in 2022 as the Federal Reserve (Fed) realise they are slightly behind the curve and we’re increasingly seeing that in the rhetoric coming through.

The two themes dominated the markets – inflation and what the Fed is doing about interest rates. Several Fed members spoke last week, including Fed chairman Jerome Powell at his renomination hearing on Tuesday 11 January.  Powell indicated the central bank would do whatever it takes to prevent inflation becoming entrenched. There was further hawkish rhetoric from a number of Fed speakers with markets now pricing in a strong chance of an interest rate hike in March and an indication that other pandemic-era economic support programmes will be unwound.

In corporate news, BlackRock’s assets under management surged past US$10 trillion due to flows into both its active and passive strategies. Like all asset managers they have benefitted from rising markets and strong inflows during 2021.

In the UK, there was positive news on the COVID-19 front regarding the spread of the Omicron variant, with case numbers falling over the week and the total number of patients in hospital on the decline. This bodes well for the proposed loosening of rules and restrictions on Wednesday 26 January, and a potential move from pandemic to an endemic phase.

In terms of markets, the hawkish tone from the Fed has put further pressure on growth stocks (-4%), particularly the longer duration stocks, while value stocks are up (+5%) over the last 30 days. We’re seeing a real division in markets at the moment due to the direction of interest rates and concerns over inflation. Developed markets remained flat (0%) over the last 30 days, which reflected the big differences in sector performance so far this year. Energy stocks (+16%) led the way on the back of oil price increases and the ongoing conflict between Russia and Ukraine. Financial stocks were also well supported, but IT stocks were down (-4%) as the higher duration IT sector underperformed.

The expectations of higher interest rates this year has obviously impacted fixed income markets negatively, but especially within global government bonds (-1.9%) and global investment grade (-1.7%) over the last 30 days. Global high yield (-0.5%) outperformed on a relative basis but was still down.

Latest Consensus Forecast
UK GDP (QoQ) 1.1
UK PMI 53.6
UK CPI (YoY) 5.1 5.2
EU GDP (QoQ) 2.2
EU PMI 53.3
EU CPI (YoY) 5.0 5.0
US GDP (QoQ) 2.3 5.8
US PMI 62.0
US CPI (YoY) 7.0

What’s happened in portfolios?

In terms of our portfolio positioning, there have been no significant shifts since the end of December when we slightly increased our equity positioning with a specific focus on cyclical value, which proved timely and played out well for investment outcomes.

We remain well positioned in terms of inflation and the current environment, particularly within equities where our bias to value has helped given the recent drawdown in growth stocks.

In terms of fixed income, our favoured short duration strategy continues to come through in terms of performance. We retain our preference for taking credit risk rather than duration risk.

Real assets, in particular infrastructure and property, remain attractive as an alternative to fixed income and also offer a level of inflation protection. Our commercial property fund, BMO Commercial Property Trust, which was a strong performer in 2021 has had a good start to the year, with an improving discount rate and management purchasing more of their own shares.

Our alternative strategies, particularly private equity, also continue to provide diversification with upside potential as economies reopen.

What’s happening this week?

19 Jan • UK Consumer Price Index (December) | 20 Jan • US Initial Jobless Claims | 20 Jan • EU Consumer Price Index (December)