What’s happened in markets?

FTSE All Share -0.82 -0.22 1.57 -0.55 16.74 7.67 5.15
Euro Stoxx 50 -2.14 -3.92 -1.99 -3.62 19.26 12.92 7.93
S&P 500 0.79 -7.31 -3.25 -6.93 18.67 20.84 16.15
Japan Topix -2.60 -6.27 -6.01 -5.79 4.24 8.98 6.28
MSCI Asia Pac. -5.08 -3.81 -7.47 -4.30 -13.53 8.67 9.18
MSCI Emerg. Mkts. -4.27 -2.82 -6.31 -3.29 -9.77 7.75 8.16
Jo’burg All Shares -1.83 1.45 8.69 -0.29 21.13 14.89 10.38
UK Gov’t Bonds -0.84 -3.30 -3.19 -2.91 -6.88 1.88 2.24
US Gov’t Bonds -0.28 -1.74 -1.53 -1.82 -3.30 3.48 2.67
Global Corp. Bonds -0.70 -2.49 -2.49 -2.52 -2.65 5.20 4.26
Emerg. Mkt. Local -1.29 -1.16 -1.74 -1.03 -7.19 1.53 2.96

Figures in the respective local currencies as at the end of trading on 28/01/2022.

The week of 24 January was a volatile week for global markets, which whipsawed between sharp sell offs and then equally strong recovery as buyers were attracted by cheaper valuations.  However, markets were generally down on the week.

In the US, there was good news in terms of economic growth as US gross domestic product (GDP) grew more quickly than expected, at an annualised rate of 6.9% in the fourth quarter. This was boosted by consumer spending, as disruptions from the Omicron variant did not hit the US until later in the quarter. This left GDP growth for 2021 at 5.7%, the strongest since 1984, reflecting the recovery we’ve seen from the economic contraction during the pandemic in 2020.

While still supported by significant fiscal spending and accommodative monetary policy, the strong growth rates in terms of GDP levels show how businesses have done well in adapting to the post-pandemic environment. Although the positive economic growth is expected to moderate over the course of the year, to around 4.0% in the US, it will remain strong compared to pre-pandemic levels.

However, with US annual inflation at around 7.0%, the Federal Reserve (Fed) is now taking a more hawkish approach and looking to withdraw some of the monetary policy support it has been providing the US economy during the pandemic. In the Federal Open Market Committee meeting on Wednesday 26 January, Fed chairman Jerome Powell signalled the central bank would begin raising interest rates at its next meeting in March and declined to rule out further interest rate rises through the year, in a “sustained battle to tame inflation”.

The International Monetary Fund released its World Economic Outlook for 2022, in which it downgraded its global growth forecast for the year to 4.4%, down from the 4.9% quoted in October 2021. This reflects the impact of three factors: the spread of the Omicron variant; the ongoing supply disruptions that could weigh on growth and keep inflation relatively high; and also the withdrawal of monetary and fiscal support around the world.

On the corporate front, tech giants Microsoft, Apple and Tesla continued to perform well in terms of earnings growth as all beat analyst sales and earnings expectations. However, supply chain issues linger as limited supply struggles to meet the increased demand, and pandemic lockdowns add to the disruption.

In terms of markets, there was a lot of volatility, as we described earlier. Risk assets sold off in response to Fed Chairman Powell’s rhetoric and refusal to rule out a string of aggressive rate rises. It was still a case of growth stocks (-11.4%) underperforming value stocks (-1.9%) by quite a margin, showing a continuation of the bifurcation we’ve been seeing in markets.

The more expensive parts of the market have been selling off and that goes for bonds as well as equities. Developed markets (-7.3%) continued to underperform emerging markets (-2.2%). Cyclical sectors outperformed, led by energy (+12.4%), and helped by another surge in oil prices (+14.0%) as a result of the ongoing geopolitical tensions between Ukraine and Russia. These marked differences in performance within the market place – between value and growth stocks, and cyclical and defensive sectors – reflect the increased expectation of interest rate hikes and the central banks’ withdrawal of liquidity.

The US dollar strengthened on the back of the Fed’s more hawkish stance, but conversely gold fell (-1.2%) given its more aggressive posture on inflation.

Fixed income continued to come under pressure on the back of rising yields.

Latest Consensus Forecast
UK GDP (QoQ) 1.1
UK PMI 53.4 53.4
UK CPI (YoY) 5.4
EU GDP (QoQ) 0.3 0.4
EU PMI 52.4 52.4
EU CPI (YoY) 5.0
US GDP (QoQ) 6.9
US PMI 62.3 59.0
US CPI (YoY) 7.0 7.3

What’s happened in portfolios?

Within our equity funds, those that are more cyclically oriented have stood out and given a more positive return. These include our UK-focused iShares FTSE100 and UK Dividend Plus passive funds, as well as our active Dodge & Cox Global Stock Fund, which benefited from its cyclical, value bias, in particular to energy and financials.

Within fixed income, our global investment grade credit managers have been hurt by the rising interest rate environment and their longer duration bias. The widening spreads, given the increased market volatility we’ve been seeing, have also not helped.

On real assets, there has been a lot of positive news following the quarterly net asset value (NAV) updates. In particular, Greencoat UK Wind announced a 4.5p increase in its Q4 NAV – helped by higher power prices – and increased its 2022 dividend in line with UK inflation. In portfolios, we have added to John Laing Environmental Assets Group to take advantage of its capital raise.

In alternative strategies, our investment trust GCP Asset Backed Income Fund also announced an increase in its Q4 NAV, up 0.35p on the back of better than expected earnings and a revaluation gain on a loan.

What’s happening this week?

02 Feb • EU Consumer Price Index (January) | 03 Feb • UK Bank of England Interest Rate Decision | 04 Feb • US Nonfarm Payrolls (January)