April 2022 was not a strong month for global equities, which declined 3.5% for UK sterling investors as inflation pressures, rising yields and further discussions around interest rate hikes impacted returns.
In regional terms, the US equity market dropped 4.3%. Declines were even more apparent for the US technology sector, down 9%, as further potential rises in interest rates put pressure on valuations. After several months of predicting action, the Federal Reserve (Fed) is now delivering on its policy shift to tackle inflation. Analysts predict 0.5% rate increases from each of the Fed’s next three meetings. A hawkish policy that Fed Chair Jerome Powell hinted was realistic and caused a reaction on bond markets; US 10-year yields rose by 0.56% in April, with global government bond yields rising also. Credit spreads also widened over the course of the month.
Emerging Market equities dropped 1% over the month. China’s zero-COVID approach along with strict lockdown measures caused a slowdown in the economy, which was reflected in performance. Rising US yields continue to support the US dollar, which has risen by 7.3% this year- strengthening relative to the Yen by 11.1.% putting pressure on the Bank of Japan to change policy, which will increase if Japanese Bond yields move higher. Japanese equities also remained in negative territory, ending the month 4.4% down.
In Europe, with no sign of any resolution to the war in Ukraine equity markets are still cautious, ending the month down 1.8%. The impact on energy markets remains acute as Europe grapples with Russian energy dependence and, despite a slight taper, European gas prices are up by 42% this year.
The UK, on the other hand, was the only major developed market that achieved positive returns in April, rising 0.8%. UK companies benefited from the commodity rally and banking sector movements on the back of the rising interest rates expectations. However, this highlights the disconnect between the UK economy and UK large cap stocks, consumer confidence in the UK and the eurozone has declined to levels consistent with a recession.
Emmanuel Macron’s re-election as French President by defeating his far-right opponent had little material effect on markets since it was widely predicted by polls, despite a narrowing margin of victory.
Risks to the recovery are increasing, in particular within Europe. Central bankers face substantial challenges as they look to tighten policy to help bring inflation back down to target without tipping their economies into recession.
Asset class returns as at 30th April 2022
The text is taken from The Tatton Weekly and is provided by Tatton Investment Management. The information in this document does not constitute investment advice or a recommendation for any product and investment decisions should not be made on the basis of it.
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