Global Market Overview – April 2022
After a difficult start to the year, April has been yet another brutal month for investors with Warren Buffet likening the stock market to a “gambling parlour” last weekend at Berkshire Hathaway’s annual conference. Most markets have been falling and a number of the classic ‘safe havens’ have not provided much shelter.
In terms of broad equity markets, the MSCI All Country World Index is down 8% for the month. US tech has been hit particularly hard as the Nasdaq is down 13% this month and a whopping 21% this year. Historically, investors have looked to fixed income to help out in sell-offs, but in this case, global government bonds have also suffered, slipping around 6% over the month.
Why have so many markets had such a hard time?
Different markets respond differently to global events, and there’s a lot going on at the moment. Let’s start with what’s happening in the world’s largest economy. US headline inflation is now at 8.5%, the highest it has been since 1981. The Fed are saying they’re serious about tackling it, and markets really do appear to believe them (at the moment). After May’s 0.5% hike, the market is pricing in another 0.5% hike at each of the next three Fed meetings – which would take the base rate to 2.75% by the end of 2022.
The two data points – US inflation and the Fed rate – can explain a lot:
Inflation is now high enough to panic equity markets; it has tipped beyond the point where planning investment decisions becomes difficult. This is one part of why stocks generally are sliding, but inflation can also explain why growth stocks are being hit hardest.
When inflation gets high, central banks tend to raise rates. Rising rates are worse for growth stocks as the high valuations growth stocks have demanded rely heavily on the prospect of strong future cash flows. The further in the future your cash flows are, the more rising interest rates will reduce how much those cash flows are worth to investors today. Instead, investors prefer to look for companies who are making money in the here and now – cash today is king!
Rising rates also explain the sell-off in bonds and the dollar rally. When US rates rise, money tends to flow to the dollar due to the increase in interest rates and returns available on dollar denominated assets.
Outside of the US, almost all other major markets have faced headwinds of their won:
There has been no conclusion to the Russia/ Ukraine conflict and intensifying fighting has led to a further fall in confidence in European markets. As a result, MSCI Europe ex-UK is down 1.1% over the month.
In China, authorities are still taking extreme measures to battle covid outbreaks. Shanghai has spent the whole of April in heavily policed lockdown, and reports of Beijing going the same way have further dented sentiment. For now, the Chinese government is prioritising its zero-covid strategy over economic growth (although at the end of the month that focus may have shifted), and MSCI China has declined 4.1% in April as a result.
The UK has fared well as the FTSE All-Share is up 0.3% over the month due to certain characteristics of UK listed companies. Being a value index and having a considerable weight to commodities (especially oil) has really helped.
Core views
Growth will be stronger than the last decade... Strong consumers, confident businesses and supportive governments mean one thing; stronger growth. The mushy, slow, volatile growth of the last decade will vanish, to be replaced with a more confident and self-sustaining growth cycle.
Inflation will be higher than the last decade… The stronger demand does mean higher inflation too. To be sure this does not mean worryingly high, but higher, nonetheless. This will have huge implications for interest rates and savers need to be ready.
May 2022
With thanks to Seven Investment Management LLP for their views and market thoughts. RiverPeak Wealth Limited