At the beginning of December last year, we wrote in our 2022 outlook, that “barring any further catastrophes, improvements should continue next year” and “in broad terms, we expect normalisation to be the key theme of 2022”. With the end of the first quarter behind us it is obvious that things have not gone as hoped. The man made, senseless humanitarian catastrophe that is Russia’s war on Ukraine is scuppering any hope of Europe normalising any time soon and the ensuing length of the energy and commodity price shock has deteriorated the economic outlook. At the same time, pandemic pressures have receded as hoped and a form of normalisation has indeed set in across the Western, vaccinated world, except sadly we are not (yet) reaping meaningful post-pandemic reopening dividends.
As a consequence, global equities declined 2.6% over the quarter for sterling investors as inflation pressures additionally drove central bank tightening which further unsettled investors. Bonds also declined for much of the period as rising yields in reaction to a deteriorating inflation outlook drove down fixed interest valuations. In March, most major equity markets rebounded, but have only partially repaired the losses of the previous two months.
In regional terms, the UK equity market ended Q1 2.9% higher, finally outperforming its global peers and the only major equity market that ended the first quarter of 2022 positively. London’s resource heavy stock market composition benefited significantly from the commodity rally and the escalation of energy price movements since the start of the year. On the monetary policy front, last year, the Bank of England was the first major central bank to raise interest rates in December and to indicate that further hikes would follow. The bank followed this up with another rate rise in March, leaving benchmark interest rates at 0.75%.
The main US market fell 1.9% (-6.3% for the yield sensitive US technology sector) as rising yields affected the more yield-sensitive growth and tech sectors. Energy and utility firms, however, erased some of the indices’ losses as they saw strong performance on the back of the Ukraine-Russia situation and the commodity rally that the escalations caused. European equities bore the brunt of the external geopolitical shock and fell 7.4% over the quarter as inflation and central bank concerns were compounded by outright energy supply security fears. Even though there has been some relief following the announcement that the US will supply the EU with American Liquefied Natural Gas, a deal that aims to reduce the region’s dependency to Russian energy, uncertainty around supplies remains and consumer sentiment deteriorated over the quarter.
Emerging Market equities dropped 4.3% over the quarter. China, the main driver of performance in the index as the biggest component, faced slowing economic activity as the region struggled with a new covid outbreak, which under China’s Zero Covid regime, forced local authorities to impose the strictest lockdown measures the nation has seen since the original 2020 outbreak in Wuhan. Japanese equities also ended the quarter down 3.9% as it was caught in the East Asian activity downdraft concerns. However, and in contrast with most of the world’s central banks, which have started tightening policies to tame the high inflation levels, Japan’s central bank announced in March a plan to expand its quantitative easing program.
Unsurprisingly, in commodities, oil prices soared 38.5%. Prices were already at all-time highs as the global economic recovery was well underway, driven by the post-pandemic activity revival narrative, when the self-imposed sanctions against Russia created further anxiety around tight global supplies.
As mentioned, March 2022 saw global equities rebound from the previous month’s low, climbing 4.1% for UK sterling investors while accelerating rises in bond yields, less to further declines in bond valuations. With geopolitical tensions at the heart of market uncertainties market volatility remained high and driven by daily news flow.
In regional terms, the US equity market rose 5.7% this month. The US technology sector gained 5.5%, which surprised, given despite the increasing pressures on equity valuations following the 25-bps interest rate hike and increasingly hawkish forward guidance from the US Federal Reserve central bank. During March the UK equity market saw an upward movement for the month, rising 1.4%. Elevated commodity and specifically energy prices supported performance. European equities marked 1.7% in March, with returns and sentiment boosted later in the month by the announcement that the US will supply the EU with American liquefied natural gas (LNG), a deal that aims to reduce the region’s dependency to Russian energy.
Emerging Market equities on the other hand moved downwards over the month, dropping 0.4%. China, the main driver of performance in the index, faced slowing economic activity as the region deals with new lockdowns.
Looking forward to the next quarter, market focus will remain on the degree that tightening monetary policy will pose considerable headwinds to equity valuations where rising corporate earning yields may no longer be relied on to drive up stock markets.
Asset class returns as at 31st March 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.
Tatton is a trading style of Tatton Investment Management Limited, which is authorised and regulated by the Financial Conduct Authority. Financial Services Register number 733471. Tatton Investment Management Limited is registered in England and Wales No. 08219008. Registered address: Paradigm House, Brooke Court, Wilmslow, Cheshire, SK9 3ND.