The week in review

What’s happened in markets?

Figures in the respective local currencies as at the end of trading on 4/02/2022.

The US Labor Department released its latest monthly jobs report on Friday 4 February, revealing the US economy created far more jobs than expected in January, even as Omicron cases peaked at the beginning of the year. Nonfarm payrolls surged by 467,000 for the month, while unemployment edged higher to 4%. The Dow Jones estimate was for payroll growth of 150,000 and a 3.9% unemployment rate.

The eurozone’s unemployment rate also fell to a historic 6.4% low in December, as hiring in Europe showed a solid recovery despite the spread of the Omicron variant, according to official figures from Eurostat released on Tuesday 1 February.

The eurozone economy grew 0.3% in the final three months of 2021, returning the bloc to pre-pandemic levels. Eurostat’s first estimate of full-year gross domestic product showed growth of 5.2% – the region’s fastest expansion since 1971.

Inflation also accelerated to a new record of 5.1%, defying expectations of a slowdown and adding pressure on the European Central Bank (ECB) to respond with tighter monetary policy. The spike in inflation prompted a shift in rhetoric from ECB president Christine Lagarde, who was no longer willing to affirm that an interest rate hike this year is “very unlikely” after the ECB’s policy meeting on Thursday 3 February.

The Bank of England also took a hawkish turn to contain inflation, increasing the key interest rate by 0.25% to 0.5%, the first time since 2004 that it has implemented consecutive rate hikes. Of the nine members of the monetary policy committee, five voted for an increase of 0.25% while the other four wanted a steeper hike of 0.5%, affirming the market’s pricing for five more rate hikes this year.

Elsewhere, shares of Facebook parent Meta Platforms Inc. plummeted on Thursday 3 February, losing over a quarter of its value (almost US$240 billion) after the company fell short with its quarterly outlook. Meta reported a list of business pressures, from its first-ever decline in daily active users, to the rise of TikTok and economic constraints on advertising spend.

OPEC+, an influential group of some of the world’s largest oil producers, agreed to boost its production quota for the eighth consecutive month on Wednesday 2 February, aiming to raise production by another 400,000 barrels a day in March.

However, despite huge pressure from major energy consuming nations to control the high energy prices that are fuelling global inflation, OPEC+ undershot its output quota in January. According to data compiled by Reuters, the group has repeatedly failed to meet its monthly target of adding back 400,000 barrels per day, due to production shortfalls in several countries.

What’s happened in portfolios?

Developed market equities ended January down (-4.4%) as growth stocks (-6.4%) came under pressure, with a few big names weighing down the index last week (particularly in sectors that had benefited from changing consumer patterns during the pandemic, where revenue growth is unlikely to be repeated in the future).

Energy (+11.8%) and financials (+1.3%) were the only sectors in the green, but value (-1.4%) in general outperformed growth (-6.4%) over the last 30 days, with materials and utilities posting low single digit losses.

Oil (+19.2%) continued to increase in value due to current tensions between Russia and Ukraine and supply side issues, while fixed income continues to come under pressure on the back of rising yields.

Looking across our portfolio, we continue to see a favourable environment for equities but do expect to see a volatile year. We maintain our preference for domestic developed markets – specifically pan-Europe where economies are reopening and valuations are not stretched on a relative basis.

We see a less favourable environment for fixed income assets, where starting yields are at historically low levels and inflation continues to pose a threat to mid- to longer-duration positioning.

Real assets present an attractive alternative to fixed income, with some inflation protection. Infrastructure is of particular interest given valuations and recovery potential.

Alternative strategies are also preferable in the current environment to provide a credible diversifier within portfolios, with private equity of particular interest to tap into the re-opening of economies.

What’s happening this week?

10 Feb • US Consumer Price Index (January) | 10 Feb • US Initial Jobless Claims | 11 Feb • UK Gross Domestic Product (December)