A relaxed read on the issues of the day
After a shaky start to the month global equity markets climbed higher in March, allowing investors to claw back some of the losses that had been registered in the previous two months when the war in Ukraine and central banks’ intentions to dampen inflation through higher interest rates weighed heavy on investors’ minds. As sizeable producers of commodities, the war between Russia and Ukraine has seen oil and commodity prices skyrocket as uncertainty over supply has increased. After oil prices peaked in early March, extra supply from the US resulted in prices falling back over the course of the month, although concern around supply chains and price inflation linger.
Within equities, the UK market has proved to be resilient this year. Among its largest companies the UK has exposure to oil, metal miners and banks, which have benefited from higher commodity prices and interest rate expectations. Many of these companies also pay dividends, which have also helped to shield investors from weaker share prices.
In Europe, consumer confidence has been dented by the war and with many EU nations relying on Russia for a considerable proportion of their energy requirements, there is concern that the conflict will push up inflation and damage economic growth. Emerging markets have also begun to struggle as China has been imposing lockdowns to deal with a surge in Omicron cases in several of its major cities.
Inflation continues to rise well above levels we’ve been accustomed to seeing for several decades, running it close to 8% in the US and around 6% in the UK and Europe. In the US, which as a commodity and oil producer is less affected by the war in Ukraine, the Federal Reserve has shown its determination to tackle inflation through a more rapid move to raise interest rates. The Fed has pushed through a 0.25% rise this year, with the trajectory to higher interest rates supported by a strong jobs market and wage inflation. On this side of the pond, there is a delicate balancing act for the ECB and the BoE which are looking to raising rates in an environment where growth is more fragile. The UK has pushed through two interest rate hikes in the first quarter and Europe may follow later in the year, but in both cases the path to more ‘normal’ interest rates looks shallower. Japan, where inflation is much lower, is something of an exception and interest rates are unlikely to rise in the same way.
Inflation and interest rate rises present a particular challenge to bond investors and we have seen performance struggle in recent months as the value of the bond’s income falls in real terms and markets expect more forthcoming new bond issues to be more attractive to investors. In the short term we expect some headwinds to remain, although we are beginning to see bonds valuations look more appealing.
As the war in Ukraine moves from its early weeks into a conflict that could last for months or longer, global economic growth could become a casualty as consumer sentiment, inflation and supply chains all experience greater strain. In periods of short-term uncertainty, our focus remains on powerful investment themes that we expect to play out over the coming years. Some businesses that are aligned to these trends are now more attractively valued and by avoiding the panic, investors have an opportunity to benefit over the long term.