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Market Commentary: April 2022

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.

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Market Update : Ukraine Crisis

Diplomatic efforts have failed to deescalate the dangerous situation unfolding in Ukraine. Our thoughts are with the Ukrainian people and all those impacted by this tragedy.

The situation is clearly impacting global markets which we completely appreciate is unsettling for our investors. This brief market update is designed to provide some context to the recent developments and draw comparisons to previous geopolitical crisis.

Despite multiple and sometimes seemingly uncoordinated efforts by Western powers to avert armed conflict in Ukraine through diplomatic means, the crisis clearly worsened recently as Vladimir Putin ordered Russian troops to enter eastern Ukraine. This action, described by the President in a television broadcast to the Russian people as a peacekeeping operation, followed the ‘recognition’ of the breakaway regions of Donetsk and Luhansk as independent states. This morning Putin has authorised military operations which now look akin to a full-scale invasion of Ukraine.

We simply don’t know and we certainly claim no geopolitical expertise. Different courses from here could clearly give rise to a wide array of outcomes in financial markets, both in terms of magnitude and longevity. Every geopolitical crisis is different of course but over the last seventy years or so the impact on financial markets of events such as Iraq’s invasion of Kuwait and the Cuban missile crisis has generally been contained and fairly short-lived. We do know, however, that Western powers have all but ruled out direct military involvement, preferring instead to pursue punitive sanctions against Russia. Given Russia’s importance as a producer of commodities, it seems probable that energy prices would rise further if the conflict escalates and sanctions are imposed. This would come at a time when oil and gas prices are already at or close to historical highs and, in the short term at least, this would exacerbate the cost-of-living squeeze in the UK and elsewhere.  With global sanctions due to be imposed, we all hope that the Russians see the potential economic damage and that the diplomats find a way through the present crisis as they did in 1962 during the Cuban Missile Crisis.

We continue to favour high quality investment funds with wide economic moats that we believe will continue to outperform over the long-term. Whilst they may have sold off over the short term, market fundamentals remain strong and buying opportunities exist for quality, active managers.

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Market Review – December 2021

A review of the markets in 2021

Despite double-digit returns from most equity markets, 2021 still presented plenty of challenges for investors. A tug-of-war raged between COVID variants and vaccines, many economies experienced their highest levels of inflation for thirty years and, in China, the authorities launched a brutal clampdown on the country’s most successful companies whilst at the same time the world’s most indebted property developer teetered on the brink of collapse.

At the time of writing, UK equities have provided a return (including dividends) of just over 17%, more than erasing 2020’s decline of 10%. The UK economy is expected to have grown by 6-7% in 2021 and corporate profits have rebounded. The UK has also been at the forefront of the global vaccine rollout.

Many overseas stock markets recorded even bigger gains, headed once again by the US which has risen by 30% in sterling terms. An eclectic mix of a vaccine-maker (Moderna), a technology behemoth (NVIDIA) and a clutch of oil companies have all seen their stock prices more than double in 2021, whilst Tesla joined the elite club of companies valued at more than US$1trn. At the other end of the performance table and for the reasons above, Chinese equities were down in 2021.

Even though the pledges made at November’s showpiece COP26 climate change conference in Glasgow disappointed many, the emphasis on environmental, social and governance (ESG) factors amongst investors became an even more powerful force in 2021.

The economic and monetary backdrop in 2021 could not have been more benign for investors in equity markets. The rollout of vaccines allowed economies to re-open, releasing a surge of pent-up demand.  Indeed, that demand has led to shortages in many parts of the supply spectrum, ranging from labour to semiconductors to energy.  Unsurprisingly, prices have risen accordingly.  The price of shipping a standard 40ft container from Shanghai to Europe has increased approximately fivefold in 2021. Even though it has plummeted by nearly 40% over the last six weeks, the price of gas is still 50% higher than where it started the year, as is the price of oil.

Despite buoyant economic growth and rising inflation, both fiscal and monetary stimuli have remained in full flow. Central banks have seemed wary and reluctant to withdraw the punchbowl. The US Federal Reserve finally began to scale back its quantitative easing programme in November but will continue to buy bonds until June next year. Here in the UK, the Bank of England will complete its latest round of bond buying this month, taking its cumulative total to £895bn. Having hinted very strongly before its meeting in November that interest rates were set to rise from a historic low of 0.1%, the Bank then surprised almost everyone by leaving them unchanged and was accused of being an ‘unreliable boyfriend’.

We remind investors that returns from equity markets in 2021 (and indeed since the Global Financial Crisis) have been exceptional and are almost certainly not sustainable at near term levels.

Outlook for 2022

Markets will continue to grapple with many of the same factors and forces that have been present in 2021.

  • As the emergence and rapid spread of the new Omicron variant has shown, the COVID pandemic is not over. Austria is coming to the end of a three-week lockdown, many other countries in Europe have re-introduced restrictions and England has just moved to ‘Plan B’, which includes guidance to work-from-home and makes facemasks mandatory again in most indoor public places. Countries will obviously revert to full lockdowns only as a last resort but the possibility that the virus, or new vaccine-resistant variants of it, could wreak further damage on economies and corporate profits cannot be ignored.
  • The tapering and then the end of quantitative easing is in prospect for 2022. What impact will this have on bond markets whose repressed yields have long supported equity market valuations? In addition, soaring rates of inflation make the continuation of negligible and negative interest rates more and more untenable. Financial markets have operated in an environment of ultra-low bond yields and interest rates since the end of the Global Financial Crisis in 2009 and the transition to higher rates, if it comes, could be challenging.
  • Of course, the biggest determinant of the likely path of interest rates in 2022 is inflation. For most of 2021, central banks maintained that the upward trend was ‘transitory’, caused by an unsustainable explosion in demand following the end of lockdowns which had temporarily overwhelmed supply chains. With every new data point that emerges, however, that argument is undermined and it is interesting that the Federal Reserve has recently decided to ‘retire’ the word from its messaging. We think that inflation rates could spike even higher in the short term before settling lower than they are at present, albeit at above the 2% level targeted by both the Bank of England and the Federal Reserve.
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Market Commentary – November 2020

The last month has seen considerable market activity resulting from significant news.  First, we have had the results of the US presidential election. Joe Biden has won, but not quite with the clean sweep that many had expected. Indeed, the Democrats failed to gain control of Congress and the Senate remains in the hands of the Republicans. This is significant as it will hinder the Biden administration. There were plans for considerably increased spending and taxation which will now have to sit on the side-lines. This is not bad news for the stock market: corporation taxes are unlikely to climb which should prove to be positive for earnings going forward. Additionally, Biden should be more predictable and less erratic than his predecessor. A more predictable and certain path is almost always good news for business and in turn the stock market.

Secondly, we have received very positive news on the arrival of a vaccine to combat Covid-19 meaning that  there is light at the end of the tunnel for this dreadful pandemic. That is not to say that the next few weeks and months will not be challenging and infection rates seem to be increasing as winter unfolds. However, there is now some certainty that the end is in sight. Unsurprisingly, markets have jumped as a consequence and some market trends have reversed.

Global indices have been led higher by the UK market which has been a long-term underperformer, particularly since the outbreak of the pandemic. Therefore, it is perhaps not surprising that it has rebounded most strongly with the arrival of a vaccine. The UK market was recently trading lower than 5,800 which was a level that we first saw in 1998.

Turning to the outlook for markets, it will be important to keep a close eye on infection rates over the winter months, particularly in the US where new cases of Covid-19 are reaching worrying levels and hospitals are beginning to fill up as a consequence. A further fiscal stimulus package might be required to help businesses endure these difficult few months, particularly if they are forced to impose lockdowns.

Secondly, Brexit negotiations are in their concluding stages. These of course will have very important repercussions for the long-term prospects for the UK. Hopefully, politicians will reach a positive agreement which will allow significant levels of trade between the UK and Europe. However, the prospects of a hard Brexit or a poor trade settlement have not gone away. Nonetheless, any greater clarity on this situation will allow us to plan for the coming years.