Market Update 21st January 2022
This week was another tough one as stocks continued to sell-off. The reason is the same as last week; inflation keeps rising, so expectations of how aggressively central banks will hike interest rates is a concern and are now extremely high. In the US, the epicentre of this particular problem, forecasts of rate rises top 1% for 2022, with some expecting a 0.5% rise as early as this month / early February. It is possible that inflation is so deeply embedded that a wrecking ball of that magnitude is needed to knock it down again, but far from certain.
However, there are still strong signs that much of the inflationary pressure is due to increased economic activity as we emerge from the pandemic. In that case the central bank’s wrecking ball could smash a hole in the economy recovery and put it into reverse. Typically, as risk managers we prepare for both outcomes. But with the difference in the two outcomes so vast, the middle ground is in danger of becoming no-man’s land. In reality we expect the market to walk back from these extremes; inflation won’t be as high as feared, and the impact of rate hikes less severe. There are no guarantees of course, but until things become clearer we are probably in for the bumpy ride that we predicted and have planned for. At this juncture we have completed our Rebalancing Proposal models across the risk profiles, and are presently applying these to each of our clients and are sending these out for agreement. The numbers below are eye candy for us having sold down our positions & reduced our weightings across the markets over the past quarter, – and as we seek to buy back in to an extent at these better values.
GLOBAL: EXPECTATION OF US FED DRIVING MARKETS
Concerns about rising US interest rates have put more pressure on global equities. US Treasury yields have also continued to rise, although increases were more restrained than recent weeks. Many investors are now predicting four interest rate rises over 2022 and expectations of an imminent 0.5% rate have risen. This is what caused the further sell-off in US equities with highly valued growth stocks (like tech stocks) and smaller companies most affected. Shares in several previously strong performers, including Goldman Sachs and Netflix, tumbled after issuing slightly disappointing earnings updates.
The US Fed has been talking about its determination to tackle inflation and its messaging has been taken on board by markets. Expectations of rate rises in the UK have also increased, although rising inflation has been balanced by disappointing retail sales. In contrast, policy makers at the European Central Bank and Bank of Japan have been reassuring markets that stimulus will remain in place with the Bank of Japan (BoJ) governor saying “raising rates is unthinkable”.
COMMODITIES: OIL PRICES SPIKE OVER SUPPLY CONCERNS
Oil prices have continued to rise strongly this week, as international benchmark Brent Crude hit $89 a barrel. This is a steep rise from the price of $68 in early December 2021 and is the highest level seen since 2014. The main factor is the rise in demand as fears of the Omicron variant of coronavirus continue to fade, and suppliers have so far failed to meet the increase in demand. Opec and its allies have stuck to plans to increase supplies gradually by raising output by only 400,000 barrels per day. The ongoing geopolitical tensions in Kazakhstan and the Ukraine have not helped.
Companies such as BP, Shell and John Wood Group have all seen their stock prices rise as the price of oil increased. BP and Shell’s shares are up around 32% over 12 months and oil services company John Wood Group is up 23% this month. Although the share prices of these companies have recovered significantly as a result of the rally, they still remain below pre-pandemic levels.
CHINA: CENTRAL BANK CUTS RATE IN RESPONSE TO GDP GROWTH SLOWDOWN
A sharp slowdown in China’s GDP growth has helped push the People’s Bank of China (PBoC) to cut interest rates to help stimulate the economy. China’s economy is growing at its slowest pace in 18 months as the country deals with a number of headwinds including a rolling programme of strict Covid lockdowns, a sharp slowdown in its property market and lower consumer spending. Annual GDP growth in Q4 2021 was 4%, down from 6.5% in 2020. The central bank cut its main interest rate for the first time in two years and followed this with a reduction in the main consumer mortgage rates.
Further stimulus could be on the way as the PBoC deputy governor promised to open the “monetary policy toolbox” to stabilise growth. President Xi Jinping also tried to reassure foreign investors over concerns about further government interference in his speech to the World Economic Forum, and warned about the global effects of major economies performing a U-turn on monetary policy if central banks are too aggressive tackling inflation.
Volatility, (“turbulence” for the sake of our argument) along with the obvious requirement to at least keep pace with the rising inflation, will probably be the key challenges for investors during 2022. So our view more than ever is that we will need to try and score some wins wherever we can throughout 2022 which in practical terms means that we will need to be quite active with our clients during the year to achieve this.
Our early opinion is that adopting an autopilot stance where one adopts a buy and hold view for 2022 could see investors simply moving up and down with risk markets, so we are closely monitoring trading ranges and we will be aiming to take as many short term profits, to then go again with buying in at better value and turning profits as we go in our attempt to keep client returns ahead of inflation.
Having been highly successful in our aim during the second half of 2021 to reduce volatility across our clients portfolios, we now see the current macro backdrop and the recent sell-off as an opportunity to invest further into carefully selected risk assets, with the view to ‘make & take’ some gains over the next 6 weeks as they arise.
Loose financial conditions have added an extra oomph to markets over the past 2 years and have provided a favourable backdrop for traditional household names to succeed whilst continuing largely on autopilot.
But all turbulence is not the same. In fact we would argue that there are four main types, each of which require a different strategy, The return of market, economic, rates and inflation volatility will all demand a deft touch from investment advisers and managers – and our chief advantages which are the very cornerstone of our success in continually guiding our clients to be able to out-perform the markets and benchmarks (and now inflation!) – namely agility and timing will be crucial.
Having the strength of our convictions and to not to be passive nor to float along on auto-pilot is probably what separates us most form the traditionals, along with our willingness to continually engage with our clients on all levels and to keep them fully informed at each ongoing step of the investment process – which results in our by and large continual out-performance – is frankly why our clients are happy to engage us to advise them on their investments. To be active and always looking to make profits and to spend so much time focusing on the protection of our clients’ capital whilst doing so just feels like common sense to us. So, whilst 2022 promises to provide investors with a year of challenges, we look forward to assisting our clients in the endeavour to maintain above benchmark, and very importantly above inflation performance during 2022, which will require an open and active dialogue with our clients, and this is certainly not the year for investment advisers & managers to be on auto-pilot!
Finally, if you enjoy reading this weekly update, please feel free to share it with your friends and / or family who may also find the contents of interest, and do not hesitate to contact us if you need any help, information or advice yourself about any of the areas covered this week.
Phil Simmonds LL.B(Hons), MBA, FPFS, Chartered MCSI
Chief Executive Officer | Solicitor (non-practising)
Chartered Wealth Manager | Chartered Financial Planner