The week in review

What’s happened in markets?

Inflation in the eurozone surged to an all-time high as the consumer price index for March 2022 came in at 7.5%, well above the 6.6% expected and the 5.9% in February. This prompted speculation that the European Central Bank will start raising interest rates sooner than expected. Particularly as the Russia-Ukraine situation weighs heavily on sentiment and activity in the region.

In the US, the monthly nonfarm payrolls beat expectations, adding 431,000 jobs in March as higher wages lured more workers back to the labour force. This took the unemployment rate to a post-pandemic low of 3.6%, which by most measures reflects full employment, and indicates a strong labour market in the US that could add to inflationary pressure. All of which suggested the Federal Reserve (Fed) will probably go ahead as expected and raise interest rates by 50-basis points at its next meeting in May.

In the UK, gross domestic product grew more strongly than expected, coming in at 1.3% in the last quarter of 2021. This was down to better than anticipated export numbers, which rose by 6.9%, and service industries expanding more quickly than anticipated at 1.5%.

The geopolitical fallout of the Russia-Ukraine conflict continued to dominate the news as oscillation in sentiment regarding war negotiations continued. Putin’s plan for gas payments to be settled in roubles was rejected by European states on the grounds it would be a breach of contract. However, it did highlight the potential risk of gas rationing in Europe in the future.

In other news, oil prices dropped after US president Joe Biden announced the release of one million barrels of oil a day for the next six months from the US Strategic Petroleum Reserve, in an attempt to lower gas prices.

In corporate news, supply issues continued to dominate. Huawei, the Chinese technology company, published its first ever yearly revenue decline, which was attributed to supply issues and a slowing demand for 5G. Although this has been exacerbated by the fact the company has been blacklisted under US sanctions.

Reported supply issues related to COVID-19 impacted the automotive sector, while Walgreens, the pharmaceutical company that owns Boots in the UK, reported pandemic demand had slowed on the back of reduced testing numbers.

In terms of market moves, the week of 28 March saw the STOXX 600 and the three main US indices post their first negative quarterly returns since the original COVID-19 onslaught in Q1 2020, making Q1 a negative quarter overall despite the recent rally in world markets.

However, March on the whole has been a positive month for equity markets, especially developed markets (+4%). However, emerging markets (-3%) have fallen behind as a result of the Russia-Ukraine situation and ongoing issues in China, which dominates the indices, due to its zero tolerance COVID-19 policy and also the regulatory crackdown on certain industries.

Growth stocks (+4%) performed slightly better than value stocks (+3%) over the last 30 days and, as last week, there was little difference in performance between small capitalisation stocks (+3%) and large capitalisation stocks (+4%). Once again, energy (+5%) performed well, but utilities (+7%) was the best-performing sector over the last 30 days. Global property (+5%) also performed well, while the worst-performing sectors were consumer staples (+1%), again, and commercial services (+1%).

In fixed income markets, the news was of certain yield curves starting to invert, which is viewed as a possible indicator of recession. In particular, the yield on the two-year US Treasury note rose above the yield on the 10-year note for the first time since August 2019, as US Treasuries suffered the worst quarter on record, on expectations of heightened tightening from the central banks.

The Japanese Yen weakened to its lowest level against the US dollar since 2015, following the Bank of Japan’s announcement that it would purchase 10-year Japanese government bonds in unlimited quantity over three sessions.

What’s happened in portfolios?

While taking a slightly more cautious tone, we remain positive in terms of risk assets in this environment, especially real assets and alternatives, while remaining underweight fixed income and cash. We have recently reduced out fixed income exposure across portfolios by selling some of our short-dated positions and are looking to redeploy this in areas we think present better opportunities such as real assets and alternative strategies.

Looking at our underlying equity funds, the managers with a value focus have been in positive territory this year on the back of their biases to energy, materials and financials. These include our active value manager Dodge & Cox, which has outperformed the MSCI All Country World Index (ACWI) by 7% in this year. Our passive UK strategies have also worked well for us.

In fixed income, with yields continuing to rise, our short duration position continues to help relative performance.

In real assets, The Renewables Infrastructure Group (TRIG) announced the acquisition of an operational solar photovoltaic (PV) site in Spain for around £80 million – this would represent 3% of the portfolio, and would mean Spain represents 8% and solar PV 15%. We see diversifying into non-wind assets as a positive move for TRIG.

Finally, in alternative strategies, the Princess Private Equity published its net asset value, which was down -0.8% in February.  This follows the sale of Voyage Care, a UK provider of specialist care, and investment in Pharmathen, an organisation focused on advanced drug delivery technologies.

What’s happening this week?

05 Apr • UK Services Purchasing Managers’ Index | 07 Apr • EU Retail Sales | 07 Apr • US Initial Jobless Claims