What’s happened in markets?

FTSE All Share 3.02 -6.28 -2.99 -4.47 7.31 4.20 3.63
Euro Stoxx 50 3.72 -11.19 -11.92 -13.95 -1.68 6.79 4.76
S&P 500 -2.84 -4.71 -10.46 -11.53 8.22 16.68 14.15
Japan Topix -2.46 -8.28 -8.74 -9.64 -4.50 6.87 5.06
MSCI Asia Pac. -4.42 -12.02 -12.88 -12.28 -21.04 4.60 6.83
MSCI Emerg. Mkts. -5.08 -12.35 -11.93 -11.70 -18.08 4.06 5.97
Jo’burg All Shares -1.31 -2.70 3.79 0.88 12.05 13.97 11.31
UK Gov’t Bonds -3.21 -0.52 -9.51 -6.37 -5.40 0.36 0.98
US Gov’t Bonds -1.61 -0.73 -3.73 -3.78 -2.63 2.52 2.37
Global Corp. Bonds -2.41 -2.67 -6.85 -6.81 -4.74 3.05 3.32
Emerg. Mkt. Local -2.72 -6.71 -6.11 -6.26 -9.06 -0.29 1.52
Figures in the respective local currencies as at the end of trading on 11/03/2022.

As the Russians increased their attacks on Ukrainian cities, markets remained volatile and headline-driven, dominated by three factors: the Russia-Ukraine situation, inflation and central bank interest rates.

US inflation reached 7.9% in February hitting another new 40-year high. The biggest driver was energy with gasoline prices up in the US by 38% year on year. Although food prices were also up strongly around 7.9%. Even with these two volatile components stripped out, core inflation jumped to 6.4%. So inflation is looking more broadly based and still suffering from some of the post-pandemic supply constraints. It is also worth noting that this February figure will not include the increases in energy prices we’ve seen so far in March as a result of the ongoing Russia-Ukraine conflict. Expectations of inflation peaking in March or April are now looking more unlikely.

In the UK, the latest gross domestic product (GDP) figure rose 0.8% in January, driven by a rapid recovery in the services sector and reflecting a bounce back from December when economic activity was impacted by the Omicron variant. However, the threat of soaring inflation, fuelled by the war in Ukraine, reinforces the case for the Bank of England to raise interest rates again in its meeting on Thursday 17 March.

In terms of monetary policy, central banks are currently in a difficult position faced with high inflation and potentially slowing growth.

The European Central Bank (ECB) met on Thursday 10 March and adopted a more hawkish tone by scaling back its bond-buying stimulus plan to tackle the risk of higher inflation. Analysts saw the move as a sign it could raise interest rates in the fourth quarter of the year. The central bank adjusted its economic forecasts for the year: setting headline inflation to average 5.1% from 3.2% and moderating its GDP growth expectations from 4.2% to 3.7%, due to the impact of the Ukraine war. Eurozone inflation rose to a record 5.8% in February, up from 5.1% in January, and well above the ECB’s 2% inflation target.

In terms of corporate news, there has been a steady stream of companies suspending their business in Russia following increasing pressure from their investors, consumers or, in some cases, governments. McDonald’s, Coca-Cola and Starbucks have all made the move due to the invasion of Ukraine. While Goldman Sachs and JP Morgan became the first major US banks to start unwinding their Russia businesses.

Markets remained volatile and headline-driven, with continued uncertainty during the week of 7 March. Risk assets fell on the back of a more hawkish-than-anticipated outcome from the ECB, along with more negative signals from the Russia-Ukraine talks. Stocks in developed markets remained in negative territory (-9%). While emerging market equities (-12%) remained weak as a result of a slump in Chinese technology stocks, after the US named companies for potential delisting for failing to meet audit requirements.

In terms of style, growth stocks (-12%) fell further than value stocks (-7%), while small capitalisation stocks (-7%) outperformed large capitalisation stocks (-10%). In terms of sectors, energy stocks remained the best performer (+22%), despite the recent pullback in oil prices on Wednesday 9 March. The more defensive sectors, such as utilities (-1%) and healthcare (-4%), also did well in terms of relative performance, while consumer discretionary (-15%) was the worst performer.

The price of oil peaked at a fourteen-year high of US$139 per barrel on Monday 7 March, but then fell back slightly midweek when a UAE official said it would encourage OPEC to increase production, although it was later announced that OPEC would be sticking with the planned production quotas. On Tuesday 8 March, the US moved to ban the import of Russian oil and gas. The UK also announced they would phase out Russian oil imports by the end of the year. Europe, which is more reliant on Russian energy imports, announced less stringent measures to reduce its dependency.

Gold (+8%) rallied and the US dollar remained strong given their safe-haven status. Bond yields also rose strongly over the week.

Latest Consensus Forecast
UK GDP (QoQ) 1.0
UK PMI 59.9
UK CPI (YoY) 5.5
EU GDP (QoQ) 0.3
EU PMI 55.5
EU CPI (YoY) 5.8 5.8
US GDP (QoQ) 7.0
US PMI 56.5
US CPI (YoY) 7.9

What’s happened in portfolios?

In equities, our Nedgroup Global Equity Fund has been our star performer, helped by its stock selection within industrials, in particular defence and weapons manufacturing companies. Meanwhile, our global active value manager has also performed well, helped by both its sector allocation and security selection – being overweight to energy and financials.

Within fixed income, investors have become increasingly confident recently that the Ukraine conflict won’t derail a potential tightening cycle this year. This has triggered yields to rise and, in turn, has caused our global investment grade bonds to fall, given their longer duration and sensitivity to interest rate movements.

Among our real asset exposure (i.e. property and infrastructure), we completed a trim of our commercial property trust to a new target by following a patient approach to avoid dragging the price down.

Last but not least among our alternative strategies, Round Hill Music Royalty Fund announced a Q4 dividend in line with policy – taking the yield to 4.5% of the company’s initial issue price. The company also announced that its 2022 target would remain unchanged.

What’s happening this week?

16 Mar • US Federal Reserve Rate Decision | 17 Mar • EU Consumer Price Index | 17 Mar • UK Bank of England Rate Decision