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During August, equities markets fell. The bearish turn in equity markets was triggered by hardening central bank rhetoric around the requirement for sustained monetary policy tightening. Falls were led by developed markets, with Europe (excluding the UK) performing worst. Conversely, emerging markets delivered positive returns as Brazil, Indonesia, India, Taiwan and mainland China rallied.

Government bond markets also sold-off during August. UK yields experienced the most significant rises as the Bank of England delivered a 0.5% rate hike and a bleak forecast for domestic inflation. Notable rises were also seen in US rates as Jerome Powell reinforced the Federal Reserves hawkish stance at the Jackson Hole symposium. In the Eurozone, the difference between German and Italian yields widened ahead of the Italian election on 25 September. Conversely, yields on Chinese bonds fell in August, as the Peoples Bank of China delivered a surprise cut to the reserve requirement ratio.

Oil markets fell over the month as signs of slowing global manufacturing, and hawkish Fed comments drove fears of a fall in demand. Gold also fell during the period, hit by higher US Treasury yields and a stronger US Dollar.

Central banks have shown a commitment to continued policy tightening, raising the likelihood that inflation will begin to cool towards the end of the year. Tighter monetary policy opens up the possibility of a recession in the US, while the prospect of a winter energy crisis raises the probability of a recession in Europe. It should be noted that that the depth and duration of any recession is likely to be limited as a result of healthy private sector balance sheets and moderate fiscal support.

A total of 3.25% of Federal reserve rate hikes is forecast in 2022, leaving policy moderately restrictive by the end of the year. Further US rate hikes are likely in early 2023 with policy makers adopting a ‘hike-and-see’ approach.  In China, growth risks imply that further policy stimulus will be implemented, including infrastructure investment, and targeted monetary easing. However, policy divergence with the US will act as a constraint.

Global equities rose in July following better-than-feared earnings reports for Quarter 2. Falling bond yields helped prompt improved valuations, boosting investor demand.

The equity market rally was led by the US– one of the major underperforming markets during the first half of 2022. The US equity index possibly gained from expectations that the Federal Reserve (Fed) could end its tightening cycle sooner than initially anticipated. European equities were also up despite the European Central Banks’s (ECB) decision to raise policy rates and weak economic data.

At the other end of the spectrum, some emerging markets remained under pressure, with the mainland China equity index falling the most across all major markets globally. Concerns related to the property market seemed to weigh on investor sentiment, and new COVID-19 cases in some cities, added to the list of worries related to the market.

Across sectors, recovery was mostly driven by the cyclical sectors – Consumer Discretionary, Industrials and Technology, all outperformed the global index. Conversely, relatively defensive sectors – Telecoms, Consumer Staples, Healthcare and Utilities, all underperformed. Meanwhile, commodities driven sectors, Basic Materials and Energy, also underperformed on the back of softer underlying prices.

Short term yields across developed bond markets moved largely in line with central bank policy, but longer dated yields dropped on recession fears. Central banks across the world continue ‘frontloading’ their cycles with the ECB delivering a 0.50% hike and the Fed continuing on their hawkish path by hiking 0.75%, though there were signs the Fed is becoming more cautious.

The US dollar (DXY) ended July marginally higher after reversing nearly all of the gains made in the first half of the month although these gains were concentrated against the EUR.   The EUR was the worst performing G10 currency in July, with EUR-USD falling 2.5% as political uncertainty, the gas crisis, and disappointing economic data pressured the pair lower. That said, the EUR reversed some losses into month-end after the ECB’s unexpected 0.50% hike on 21 July.  GBP closed the month basically flat against the USD.

Fearing a global recession, oil prices fell 4% in July (Brent crude) as concerns of a global recession intensified. The bulk of the gains triggered by Russia’s invasion of Ukraine were reversed, with central banks hiking rates to tame inflation and therefore increasing fears of a slowdown that will negatively impact demand for commodities including energy.

Global growth remains challenged by rapid central bank policy tightening, and further upside inflation surprises that is squeezing real incomes. There is a rising chance the UK and Eurozone tip into recession this year, and the US enters a downturn in 2023, although elevated uncertainty means precise timing is difficult to predict.

Positively, however, the depth and duration of any recession may be limited by healthy private sector balance sheets and moderate fiscal support. Furthermore, falling inflation later this year should allow central banks to adopt a more neutral policy stance.

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.

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.