Global equities posted positive returns in March. The market see-sawed at the start of the month as risk appetite fluctuated on news flows related to the situation in Ukraine. However, apparent progress in Russia-Ukraine talks towards the end of the month, boosted investor sentiment. The rally was mostly driven by developed markets, mainly the US, Australia, Singapore and Japan. On the other hand, emerging market underperformed, largely driven by rising COVID-19 cases, and renewed lockdowns in China.
Global Government bonds delivered negative returns over the period. Notably both the US and UK increased interest rates by 0.25%, resulted in rising yields and flattening curves in the regions. The Bank of Japan underscored its commitment to Yield Curve Control in the last week of the month, with the central bank buying JGBs as the yield on the 10Y approached the bank’s stated upper band. Chinese government bonds continued their divergence from other major markets, with yields falling over March. Most emerging markets saw yields rise.
The dollar experienced strength over the month, benefiting from both increasingly hawkish monetary policy and its safe haven status during a volatile market. In contrast, the euro slipped 1.4% in March as concerns around the European growth outlook intensified amid soaring energy prices. Meanwhile, GBP slumped to a fresh YTD low as markets reacted to less hawkish than expected sentiment from the Monetary Policy Committee.
Oil prices continued to climb in March, supported by OPEC+’s decision not to accelerate production increases, the situation in Ukraine, and the US and UK moved to ban Russian oil imports. Markets cooled in the second half of the month on expectations of slowing Chinese demand and President Biden’s announcement of a record release of 1m barrels of oil per day from US strategic reserves for six months.
Gold prices also rose in March, with the majority of gains seen in the first week of the month. The escalating situation in Ukraine helped gold to garner strong buying interest, on top of its appeal as an inflation hedge.
Recent geopolitical events worsen the outlook for growth and inflation. The eurozone is particularly vulnerable to Russian energy supplies and, amid confidence effects, the bloc is likely to fall into technical recession. However, global supply-side constraints may have peaked which would ease inflationary pressure and support growth.
Historically, markets have rebounded quickly from geopolitical shocks, and market activity in March is in line with this expectation. However, we are not out of the woods yet and investors should brace for continued market volatility, be realistic about investment market returns, and focus on the long-run.
Central bank tightening in 2022 will remain a key headwind to market performance, we expect the Fed to deliver 225bps of rate hikes this year. Importantly, global interest rates are likely to peak at levels well below previous high points, limiting the downside risk to markets.