What’s happened in markets?

FTSE All Share 1.86 1.11 2.11 1.93 18.79 6.85 5.37
Euro Stoxx 50 1.78 -2.80 -4.33 -3.10 16.04 12.71 8.22
S&P 500 -1.79 -6.15 -4.64 -7.16 14.39 19.72 15.86
Japan Topix 2.22 -1.65 -2.12 -1.48 3.82 10.97 7.27
MSCI Asia Pac. 1.25 -0.88 -3.48 -0.29 -15.00 9.64 9.74
MSCI Emerg. Mkts. 1.60 -0.16 -2.79 0.74 -11.06 8.98 8.72
Jo’burg All Shares 1.56 3.30 10.78 3.68 20.84 16.65 11.37
UK Gov’t Bonds -1.47 -4.05 -6.54 -5.88 -7.45 0.53 1.28
US Gov’t Bonds -0.31 -1.67 -3.64 -3.08 -3.98 2.84 2.33
Global Corp. Bonds -0.44 -2.92 -4.44 -4.25 -4.17 4.20 3.79
Emerg. Mkt. Local 0.30 1.04 -0.73 0.48 -6.92 1.88 2.93

Figures in the respective local currencies as at the end of trading on 11/02/2022.

The week of 7 February was marked by volatility in markets as a result of rising inflation and interest rates, ongoing geopolitical tensions over Ukraine and, in more positive news, more signs of economies reopening.

In terms of the key events, the focus in the US was on inflation as the consumer price index came in at a 40-year high of 7.5% in January, above expectations of 7.3%. The 10-year US Treasury bond yield rose over 2% on the surprise news and the market started to price in more aggressive monetary policy tightening from the Federal Reserve (Fed). It now appears to be factoring in a 50 basis point increase in March and an expectation of six or seven rate increases during 2022, up from a previous estimate of five. Even US core inflation, which excludes energy and food, was up 6% year on year. Inflation figures and tightening monetary policy dominated the rhetoric as St. Louis Fed president James Bullard said the central bank should hike rates by 100 basis points over the next three meetings and raised the possibility of interim policy meetings in order to contain inflation.

In more positive news, the UK economy grew at its fastest rate since the Second World War, reporting a sharp 7.5% increase in gross domestic product during 2021. This was the strongest growth among the G7 members, but it must be remembered that the UK was recovering from a lower base, having been the weakest G7 economy during 2020 when it contracted by 9.4% during the pandemic.

At the European Parliament on Monday 7 February, European Central Bank president Christine Lagarde pushed back against pressures to raise interest rates and highlighted that the central bank would take a gradual approach to tightening monetary policy, drawing a distinction from other advanced economies that may need to tighten quicker.

In corporate news, both The Walt Disney Company and Uber Technologies posted good results. Disney saw strong recovery in 2021 compared to 2020 due to gains in its streaming subscriptions and rising theme park visits. Uber released better than expected quarterly earnings and recorded the most active users in its history. Both results reflect the continued reopening of economies around the world as the impact of the Omicron variant recedes.

Markets were down overall over the last 30 days, as developed market, interest rate sensitive growth stocks continued to lag. It was very much a reiteration of what we’ve been seeing so far this year. In terms of style, growth (-7.7%) underperformed value (-2.4%) quite sharply. Energy (+7.4%) continued to push higher on ascending oil prices (+12.9%), given the ongoing geopolitical tensions between Russia and the West over Ukraine. While financial stocks (-0.7%) performed relatively well in terms of the outlook for higher interest rates.

The higher US inflation finally pushed the 10-year Treasury yield above 2% for the first time since August 2019 – causing declines across fixed income. The front end of the yield curve saw sharper moves up as investors priced in more aggressive rhetoric from the Fed, resulting in a flattening of the yield curve, as the spread between US Treasury 2-year and 10-year notes decreased.

However, the tensions over Ukraine mounted late on Friday 11 February, with the US and UK recommending their citizens leave the country, which also caused a pull back on risk assets and a flight to safety in terms of Treasury bonds.

Latest Consensus Forecast
UK GDP (QoQ) 1.0
UK PMI 54.2
UK CPI (YoY) 5.4 5.4
EU GDP (QoQ) 0.3 0.3
EU PMI 52.3
EU CPI (YoY) 5.1
US GDP (QoQ) 6.9 7.0
US PMI 59.9
US CPI (YoY) 7.5

What’s happened in portfolios?

Looking across our portfolios, we remain positioned well across the board. Within equities, we’re biased more towards value so we have more positions within the cheap parts of the market and the most exposure to cyclicals, which is helping to soften the impact of falling markets. Our domestically focused UK passive funds have outperformed given their bias to financials and energy.

Within fixed income, our short duration bias has continued to be helpful, particularly in high yield which has outperformed investment grade – which makes sense as we are not yet at a stage where there’s a real economic threat. It also benefits us in a falling market environment and is helping to protect capital for clients given the rising interest rates.

Our focus on alternatives and real assets, which have some linkage to inflation, has been helpful. For example, our exposure to renewable energy is benefiting from higher electricity prices and is also inflation-linked as a result of their subsidies. Impact Healthcare has also been able to raise its rates due to its inbuilt link to inflation.

In terms of real assets and alternatives, we’ve had a lot of net asset value (NAV) releases recently which we’ve highlighted in previous reviews and they continue to present an attractive alternative to fixed income. However, our indirect exposure to property and infrastructure has followed global equities down for the year to date, as with indirect investment, we are buying shares in companies that invest in the underlying structure rather than buying the property or infrastructure itself.

Our alternative strategies continue to provide a credible diversifier within portfolios. The Hipgnosis Songs Fund is now off its previous lows and we’re starting to see a recovery following the recent conflict between Neil Young and Spotify.

What’s happening this week?

15 Feb • EU Gross Domestic Product Growth Rate (Q4) | 16 Feb • UK Consumer Price Index (January) | 17 Feb • US Initial Jobless Claims