January was a negative month for risk assets, due mainly to the increase in hawkish rhetoric by the central banks as a result of higher and more persistent (less transitory) inflation than previously forecast. This translated into the market pricing in a greater number of interest rate hikes this year. For example, the market went from expecting around three (25 basis point) increases by the US Federal Reserve at the start of the year to five hikes by the end of January. The expectation of tighter monetary policy caused risk assets, especially the more expensive parts of the market, to sell off and volatility to significantly increase during the month. The decline in risk appetite was exacerbated by geopolitical concerns, with the threat of Russia invading Ukraine and the related tensions/brinkmanship between Russia and the United States.

Global equity markets were down sharply on the month (-4.6%), with the more expensive and ‘tech’ heavy markets such as the US (-5.7%) falling the most. The cheaper and more cyclically exposed UK stock market (+1.9%) generated a positive return, while emerging market equities (-1.8%) outperformed developed markets on a relative basis, having significantly lagged developed markets in 2021. In terms of style, growth stocks (-8.6%) substantially underperformed the more value (-1.2%) cyclically-orientated equities. This was also reflected in sector performance with higher valued information technology stocks (-8.2%) falling considerably, while cheaper financials (+1.4%) and energy (+13.1%) sectors rose.

Within fixed income markets, the expectation of increasing rate hikes from central banks combined with the sell-off in risk assets meant there was no place “to hide”, especially within “safe haven” government bonds. Looking at the detail, UK government bonds (-3.8%) and global investment grade credit (-2.6%) generated a negative return over the month, while at the riskier end of the spectrum global high yield (-2.4%) and emerging market hard currency debt (-2.9%) also declined as spreads widened.

In terms of real assets, property markets generated an equity-like return over the month with the global REITs index down -5.0% over the period. Commodities (+8.8%) were up sharply, led mainly by crude oil (+17.7%) as a result of higher demand expectations (due to reduced concerns over the Omicron variant of COVID-19) and geopolitical tensions with Russia over Ukraine.

FTSE 100 7384.54 7464.37
DJ Ind. Average 36338.30 35131.86
S&P Composite 4766.18 4515.55
Nasdaq 100 16320.08 14930.05
Nikkei 28791.71 27001.98
£/$ 1.3532 1.3447
€/£ 0.84133 0.83528
€/$ 1.1370 1.1235
£ Base Rate 0.25 0.25
Brent Crude 77.78 89.26
Gold 1829.20 1797.17

This month’s values quoted as at 31/01/2022. The above values are sourced from Bloomberg and are quoted in the relevant currency.