What’s happened in markets?

FTSE All Share -0.91 1.86 3.30 0.27 14.55 6.95 5.29
Euro Stoxx 50 -1.00 1.40 2.05 -1.51 19.81 13.88 8.43
S&P 500 -5.67 -5.32 -3.01 -7.66 15.74 20.07 16.21
Japan Topix -2.55 -2.04 -3.55 -3.27 5.78 9.68 7.06
MSCI Asia Pac. -1.01 3.28 -3.82 0.82 -12.87 10.99 10.82
MSCI Emerg. Mkts. -1.04 3.43 -3.47 1.03 -9.53 9.64 9.64
Jo’burg All Shares -0.42 5.30 13.57 1.56 21.52 15.34 10.98
UK Gov’t Bonds -0.46 -2.81 1.36 -2.09 -5.34 2.46 2.34
US Gov’t Bonds 0.23 -1.62 -0.54 -1.54 -2.76 3.67 2.73
Global Corp. Bonds -0.10 -1.77 -1.01 -1.83 -1.88 5.66 4.42
Emerg. Mkt. Local 0.12 0.81 -0.86 0.26 -7.00 2.26 3.38

Figures in the respective local currencies as at the end of trading on 21/1/2022.

The week of 17 January was a record-breaking week in the UK, with unemployment dropping to a post-pandemic low of 4.1%. Meanwhile, concerns about the cost of living deepened as inflation, measured by the consumer price index, hit a 30-year high of 5.4% year on year for December. This has increased pressure on the Bank of England (BoE) and markets are now pricing in a 25 basis points rise when the BoE’s Monetary Policy Committee meets on Thursday 3 February.

There was good news on the pandemic front. A continuing drop in UK COVID-19 cases led to a relaxation of restrictions. Since the UK was among the earliest countries hit by the Omicron variant, this bodes well for other territories now grappling with surges of positive cases.

In Europe, the European Central Bank (ECB) president, Christine Lagarde, signalled that the ECB had every reason to take less rapid and forceful steps on interest rates than the US Federal Reserve, given the euro area’s lower inflation and less advanced economic recovery.

Meanwhile, tensions between Russia and Ukraine showed no signs of abating, despite talks. President Vladimir Putin denied he is planning to attack Ukraine, but the US and EU have threatened severe sanctions in the event of an invasion.

Elsewhere, the Bank of Japan acknowledged inflation expectations are picking up, given rising energy costs, but opted to maintain its current negative interest rates and monetary stimulus.

On the corporate front, 39 S&P 500 companies reported earnings. There were some mixed results for financials, which saw lower trading revenues and higher expenses. However, Bank of America reported a quarterly growth in net income of 28% and forecast further robust growth this year, with consumers and companies starting to take on debt again.

Netflix hit the headlines with slowing subscriber growth. Shares immediately slumped by more than 20%. While the business achieved better-than-expected earnings for Q4 2021, growing competition saw it forecast an extra 2.5 million subscribers over the next quarter, well below the 6.3 million analysts had predicted.

As markets moved to price in more tightening, developed market equities (-4.92%) and defensive growth stocks (-8.66%) have sold off, while higher-duration tech stocks (-9.97%) took a hit due to higher discount rates.

Evidence of the Omicron variant’s lower-than-expected severity helped to keep energy stocks (+11.14%) firmly in positive territory. Oil prices (+17.72%) were also boosted by supply concerns, after the drone attack on a UAE oil facility, and a brief flow outage caused by a fire on a pipeline from Iraq to Turkey.

Fixed income assets have come under pressure as yields pushed higher in the first few weeks of 2022. Longer-dated government bonds and investment grades are among the poorest-performing areas, with inflation a clear threat.

Latest Consensus Forecast
UK GDP (QoQ) 1.1
UK PMI 53.4 54.0
UK CPI (YoY) 5.4
EU GDP (QoQ) 2.3
EU PMI 52.4 52.6
EU CPI (YoY) 5.0
US GDP (QoQ) 2.3 5.3
US PMI 62.3 61.0
US CPI (YoY) 7.0

What’s happened in portfolios?

Given their exposure to growth stocks, global equity funds such as Fundsmith and Morgan Stanley have struggled recently. However, we remain confident in their longer-term performance. As mentioned earlier, it is also a less favourable environment for fixed income, but our short duration bias has allowed us to perform relatively well.

Our focus on real assets and alternative strategies provides important diversification. They offer some protection from inflation, alongside attractive yields.

In real estate, BMO Commercial Property Trust has been shaking up its portfolio. Its purchase of two logistics assets for £66 million, plus a £10.5 million commitment to two developments within its existing portfolio, demonstrate its willingness to react to opportunities and benefit from long-term structural growth tailwinds.

Among alternative investments, the share price of Princess Private Equity has faltered recently after a very strong run. However, its recent sale of specialist care provider Voyage Care at a 24% increase to book value was positive news. Our confidence in its long-term growth prospects remains high.

What’s happening this week?

25 Jan • UK Public Sector Net Borrowing (December) | 27 Jan • US Initial Jobless Claims | 28 Jan • EU Consumer Confidence (January)