Global Market Overview – March 2022
It’s been over a month since the unthinkable happened. But it feels like a lifetime. The human cost has steadily worsened over that time and we can only hope that it recedes soon.
Looking at markets, it would be difficult to tell anything major is going on. Most equity markets are up for the month, with China being the notable exception – isn’t it always?
Stepping back though, markets are still down on the year. There is a lot to dissect in these numbers, but two key data points explain most market moves: oil prices and US treasury yields - both sharply up.
Why is it happening?
Cutting the US equity market by sectors tells the story. All sectors are down apart from two: utilities and energy. The former is up marginally, the latter is up 36%! The IT sectors and consumer discretionary (dominated by Amazon) are lagging the market materially.
The energy sector has certainly surprised to the upside. Oil prices rising 35% since the turn of the year has caught most investors out. Commodity businesses have spent years cleaning up their balance sheet and reducing unprofitable supply. They were starting to look investible again. But now western governments have cut global supply with the strike of a pen, potentially boosting the profitability of commodity companies across the board (except those in Russia of course!). It’s not just US energy companies - Brazilian equities are up 35% this year in USD terms. And emerging market (EM) currencies (excluding the Ruble) turn conventional wisdom on its head, showing resilient performance even as the Fed turns hawkish.
Notably, financials sit in the middle pack. Growth concerns emanating from Russia/Ukraine mean returns are down, but higher bond yields support outperformance vs. those large tech companies. Part of the surge in bond yields have been driven by the rising oil prices but as we’ve said for some time, this readjustment was long overdue.
We suspect that some combination of central bank and commodity uncertainty is likely to dominate market sentiment for a while.
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.
April 2022
With thanks to Seven Investment Management LLP for their views and market thoughts. RiverPeak Wealth Limited