What’s happened in markets?

FTSE All Share -0.45 1.03 0.55 -0.57 13.61 5.45 4.79
Euro Stoxx 50 -2.54 -2.53 -7.24 -7.39 10.48 9.71 7.03
S&P 500 0.84 0.80 -6.41 -7.80 16.10 18.16 15.16
Japan Topix -2.47 -1.04 -7.21 -5.79 -0.50 7.49 6.26
MSCI Asia Pac. -4.65 -3.80 -7.84 -5.63 -17.40 6.44 8.18
MSCI Emerg. Mkts. -4.84 -3.13 -6.19 -4.80 -13.28 5.83 7.19
Jo’burg All Shares -2.09 3.42 6.25 1.50 15.49 14.09 11.35
UK Gov’t Bonds -1.23 -3.66 -6.04 -5.47 -3.40 0.77 1.03
US Gov’t Bonds -0.34 -1.62 -2.68 -3.35 -2.01 2.75 2.17
Global Corp. Bonds -0.66 -3.24 -4.68 -5.29 -3.22 3.74 3.38
Emerg. Mkt. Local -1.81 -0.42 0.58 -0.86 -5.88 1.19 2.44
Figures in the respective local currencies as at the end of trading on 25/02/2022.

Russia’s full-scale invasion of Ukraine unsurprisingly dominated news feeds during the week of 21 February, and over the weekend, as Ukrainians put up a stronger resistance to Russian forces than had been expected and due to the constant, incremental ratcheting of sanctions by the US, UK and EU in particular.

At the time of writing, and further to last week’s update, Russian banks connected with the country’s defence industry have been targeted and governments have sought to prevent Russia from issuing debt to overseas investors, as well as targeting the assets of oligarchs connected with President Putin, and his own, with Switzerland departing from its usual neutrality. Over the weekend, an agreement was reached to expel some of Russia’s lenders from the SWIFT global payments system and, although sanctions have stopped short of curbing Russia’s energy exports – exports (it’s worth noting) continued throughout the cold war – they will also limit the ability of Russia’s central bank to use its international reserves. This will hamper the Central Bank of the Russian Federation’s ability to support the rouble.

Putin also responded to the increasing high stakes by bringing the nuclear threat to the fore as initial peace talks take place on the Ukraine/Belarus border.

The ostracisation of Russia also continued with corporate actions now beginning to be announced, e.g. the decision by BP to divest its 19.75% stake in Russian oil giant Rosneft, through to sport, as UEFA moved the Champions League final from Russia to France and Formula One cancelled the September 2022 Russian Grand Prix.

Although we expect news concerning Ukraine to continue to dominate – and impact financial market volatility – it is still good to provide an update on economic data releases, which continued to show positive momentum as global purchasing managers’ index (PMI) flash figures came in stronger than expected, as we highlighted in last week’s review, as the eurozone came of off an 11-month low in January 2022 to reach a five-month high in February. The UK hit its fastest pace of expansion since June 2021. Low unemployment numbers in developing markets continue to also be published.

The question for many investors, however, remains focused on inflation and whether the Ukraine crisis will mean central banks remain focused on tightening monetary policy, e.g. by raising interest rates, or if they step back from further action, if only in the short term. It also remains unclear whether any intentions from governments to help citizens against the increasing energy prices will also be inflationary.

Riskier assets fell sharply in value over the week of 21 February, before clawing back some ground on Friday in a late rally. Overall, stocks in developed markets were only marginally positive (+0.2%), while emerging markets ended in negative territory (-3.2%). In terms of style, growth stocks (-0.4%) fell further than value stocks (-0.0%), while small capitalisation stocks (+0.9%) outperformed large capitalisation stocks (-0.4%). Yet again energy stocks were the best performing sector (+2.3%) and consumer discretionary the worst (-2.9%).

The price of oil rose above US$100 a barrel for the first time since 2014 and European natural gas prices soared by almost 70%, but prices may not rise much further if the conflict only lasts for a few weeks and may even start to retreat.

In other commodities news, the combination of Russia and Ukraine together accounting for a third of the world’s wheat exports led to prices touching a 13-year high in anticipation of supply disruptions. Aluminium, meanwhile, rose to a record high of US$3,449 a tonne given Russia is a big producer of the metal, as well as of copper, nickel, platinum and palladium – markets that were also affected.

Gold prices surged to their highest level in over a year and the US dollar strengthened given their safe-haven statuses. US government treasuries also increased in trading, but dropped back at the end of the week.

Latest Consensus Forecast
UK GDP (QoQ) 1.0
UK PMI 60.2 60.2
UK CPI (YoY) 5.5
EU GDP (QoQ) 0.3
EU PMI 55.8 55.8
EU CPI (YoY) 5.1
US GDP (QoQ) 7.0
US PMI 59.9 61.0
US CPI (YoY) 7.5

What’s happened in portfolios?

It’s worth at this point highlighting how little exposure we have to Russian financial market assets, with almost zero percent in fixed income and very little in equities – less than 0.3% in our global equity portfolio. Therefore, a balanced investor will see only 0.1% of their portfolio invested, a level that decreased due to active management by our emerging market manager who sold down its state owned company positions due to the economic situation in Russia.

In equities, we took advantage of the more than 10% decline in values we have seen year to date to top up positions in a core S&P 500 exchange traded fund. The move was funded by a reduction in our holdings in longer-dated US government bonds, which had rallied earlier in the week.

Among our real asset exposure (i.e. property and infrastructure), it’s worth noting that Greencoat UK Wind remains in positive territory – one of a few assets to do so – and is benefiting from the higher energy prices and since the investment trust offers dividends linked to inflation.

Last but not least among our alternative strategies, we added to our Hipgnosis holdings given the slight weakness we have seen of late and as the acceptance of the strength of its cashflow revenues continues to gain ground. This will see the current discounts on that cashflow reduce further over time.

What’s happening this week?

2 Mar • EU Consumer Price Index | 3 Mar • UK Purchasing Managers’ Index | 4 Mar • US Unemployment Rate