Market Commentary – 24th March 2022
It is a month since Russian invaded Ukraine and the humanitarian crisis has deepened with over a quarter of Ukraine’s population (more than ten million people) having now fled their homes.
Despite this and after initial falls, the markets have stabilised and in most cases are higher than they were at the start of the war. In the past fortnight since our last update the MSCI ACWI index has returned 4.20%. The best performing market over this period has been Japan with the TSE Topix index returning 7.19%. Second best was the UK’s FTSE All-Share which advanced 4.36%.
We started the year with inflation fears and the threat of higher interest rates weighing quite heavily on the minds of investors and most markets are still negative for the year although no longer in bear market territory. By contrast the resource rich and more value-oriented FTSE 100 is up 2% year to date.
Year to date Since the start of the invasion
Source: Financial Express Analytics, bid to bid, total return, GBP, as at 23rd March 2022.
If equity markets have settled down, bond markets have not. The FTSE Actuaries UK Conventional Gilts All Stocks index and ICE Band of America Sterling Corporate index have each declined almost 8% since the start of the year. It might be tempting to abandon bonds altogether given concerns about rising inflation and interest rates (the Bank of England has recently announced an increase in base rates for the third month in a row and last week the US Federal Reserve approved its first interest rate increase in more than three years and pointed to further hikes at its six remaining meetings this year). Certainly, with yields as low as they have been in recent times they have not offered much, if any, scope for capital gains. However, this is not principally why we continue to recommend that clients maintain an allocation. Over the longer term the combination of return-seeking assets coupled with those that are more defensive is the best way for an investor to achieve their investment objectives within a given risk profile and whilst it can be difficult, maintaining a disciplined approach is key. Over the short term there can be dislocation, high volatility and periods of high correlation (when bonds and equity prices move in the same direction) but over the longer-
term bonds have continued to demonstrate that they provide much needed diversification and can act as a safe haven in times of extreme stress, particularly government bonds. During the pandemic induced sell-off in February 2020 gilts rose 2.52% whilst the FTSE All-Share fell 31.27%. (Source: FE Analytics, 19th February-22nd March 2020).
Moreover, the recent rise in yields which has caused the price decline in the benchmark indices illustrated in the charts above presents, according to some managers, an opportunity. In their recent commentary the managers of the Allianz Gilt Yield fund write:
“In our view, global government bonds are not sufficiently pricing in a global economic growth
slowdown. We believe that the growth outlook will not only weaken, but central banks could move less hawkish in the face of all the growth risks (which now also includes the Ukraine/Russia crisis). Thus, we continued to add duration to our Gilt Yield fund throughout the most recent crisis in both the United Kingdom (via a 10-year Gilt future) and Canada. Our latest headline duration as at 18th March is around 12.60 years compared to our benchmark’s 11.48 years. Note that we were running an underweight to duration up until the end 2021.”
This reminds us that whilst at the portfolio level we tend not to recommend changes very often the managers of the underlying funds are reacting to markets and events.
Blackrock European Dynamic recently bought into market weakness focusing on high quality defensive companies that can protect the fund and continue to deliver earnings growth even if European growth is a bit weaker over the rest of the year. In addition, with energy prices likely to remain high due to political risk premium and years of underinvestment leading to limited capacity to increase supply, they have added Total to the fund. They have also selectively increased their exposure to the banking sector which was hit heavily by de-risking as a result of the invasion, identifying companies such as SocGen and Caixabank which they feel will benefit from potential rates hikes in Europe.
Finally, the sanctions on Russia, one of the world’s largest exporters of oil and gas has shone on a spotlight on energy security and sustainability and highlighted the risks to inflation from constrained supply. With approximately 43% exposure to renewables Foresight Global Real Infrastructure Securities has benefitted from a surge in the share prices of renewable energy companies as European governments have accelerated their green energy programmes. The managers have recently started taking profits in some of these companies in a bid to capture upside but also limit the downside in the portfolio. Furthermore around 70% of the fund’s value has contracts directly linked to inflation.
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.
25th March 2022
RiverPeak Wealth Limited