Market Commentary – 11th March 2022
In the past fortnight the war in Ukraine has intensified and each day brings news of unspeakable horrors such as the bombardment of a maternity hospital in Mariupol, a city now under siege. Against such a backdrop it is hard to focus on financial outcomes and even harder to try to make sense of what is going on in markets. The Ukrainian’s robust defence of their country against Russian aggression has been extraordinary (perhaps to President Putin’s surprise) but it is clear that there is not going to be a swift resolution. Markets are extremely volatile and likely to remain so for some time.
In the first ten days following our last update it would have been easy to conclude that sticking tight was the wrong strategy as markets, which had initially proved relatively resilient, came under sustained selling pressure. Europe bore the brunt with the FTSE World Europe ex UK index falling 10% but the FTSE 100 also declined 7% and the S&P 500 by 5%. (Source: FE Analytics, bid to bid, total return, local currency, 25th February to 8th March 2022). A soaring oil price which reached the highest price of $139 since July 2008, at the start of trading on Monday 7th March, led to a day of uncomfortable losses for global stock markets. However, on Wednesday 9th March risk appetite resurged as the oil price fell dramatically, with Brent Crude futures experiencing the fifth steepest fall ever, since existing in their current form. This brings to mind the, oft quoted but worth recalling, studies carried out by Fidelity to remind investors of the importance of “time in the market, not timing the market”.
The chart below from Fidelity shows the average annual performance over 15 years of the FTSE All-Share and how this performance changes when the best trading days are excluded.
Data source for chart and table: Datastream as at 31/12/2021. Indices calculated in GBP, based on daily returns/closing prices, disregarding inflation. The chart shows the average annual performance of the FTSE All Share over the whole period from 29/12/2006 to 31/12/2021 compared with the performance over this period excluding the best 10, 20, 30 or 40 trading days. Fidelity has been licensed by FTSE International Limited to use the name FTSE All-Share Index.
But what about inflation?
As we mentioned last time investors had started to worry about inflation well before the Russian invasion. These concerns have been exacerbated by further rises in commodity prices as a result of sanctions and disruption to supply. Europe currently imports 25% of its oil and 40% of its gas from Russia. This is not easily to replace (although we were interested to see a chart from JP Morgan that suggests that it is not impossible). Even though sanctions on energy are only being discussed and have not yet implemented, supply is already being constrained as corporates front-run their governments and withdraw from Russian operations which is leading to higher prices. We can be grateful that the weather is getting warmer for now, but we don’t know what the situation will be later in the year. It seems almost certain that the conflict will mean a higher and delayed peak in inflation.
However, as we have written before it is not inflation per se that is the worry (except for those facing a cost-of-living crisis) but how Central Bankers respond. If they fail to get a grip on inflation then they will lose the confidence of market participants but act too soon or too aggressively to raise interest rates and they will propel their economies into recession. It is encouraging that going into this crisis the major economies were in robust health. Recent data show that US unemployment is low (meaning that whilst there is a risk of a wage-price spiral consumers have jobs and can afford to absorb some of the price increases they are facing) and that economic activity in the UK is strong with the IHS Markit/CIPS UK Manufacturing and Services Purchasing Manager Indices both rising to levels associated with a strong expansion in February. The US is almost certain to raise rates later this month as planned but may well not continue to hike as aggressively as previously forecast. Europe is at greater risk of falling into recession but it appears from recent statements by heads of the national central banks, as well as European Central Bank executives, that they are well attuned to the risks of over-tightening monetary policy. In other words, the authorities will be keen to prioritise economic growth and spending on securing their energy supply through investment in energy efficiency and renewables, rather than worrying solely about higher energy prices.
Under this scenario we feel reasonably well positioned with exposure to high quality growth companies with pricing power and robust cashflows in funds such as Intermede Global Equity and Blackrock European Dynamic, as well as some exposure to rising oil and commodity prices via Man GLG Undervalued Assets, of which the top three holdings are Shell, BP and Glencore making up approximately 20% of the fund’s value.
As always, we would like to remind clients that the best way to achieve their investment objectives over the longer term is to remain invested in portfolios that are diversified across different asset classes, geographies and investment styles and which are commensurate with their capacity for loss and appetite for risk.
RiverPeak Wealth Limited