Market Update 28 January 2022
This week our attention turns to the tension along the border of Russia and Ukraine. This doesn’t strictly count as news – the build-up of Russian forces has been going on for many months and is a continuation of the aggression started with the annexing of the Crimean Peninsula in 2014. Russia denies they plan to invade Ukraine but the possibility of an invasion has been building and a cynic might say provides a welcome distraction from the domestic problems faced by UK, EU and US political leaders. Last minute negotiations are ongoing and if unsuccessful the sanctions that could follow will only further exacerbate the energy shortage and could cause more serious economic damage to the EU and UK. It does make the case strongly for reducing the UK’s and EU’s dependency on Russian gas.
Elsewhere the world was eagerly awaiting the latest musings from the US Federal Reserve after markets sold off heavily at a perceived change in mood at the start of the year. The event was a bit of an anti-climax with nothing either confirmed nor denied. Despite this, reports of this being a great buying opportunity and simultaneously the end of days hit our in-box in roughly equal proportions. Our view is that at these levels, – which we have been expecting and largely predicting during the 4th quarter further to our de-risking strategy since the summer 2021, – are levels that we should be buying into albeit with some caution and that is what we are presently doing with our view to buy in and to “make and take” short term profits as we go which we believe is going to be crucial in our endeavours to match inflation in these challenging times and so protect the real value, the purchasing power of our clients’ capital.
GLOBAL: OUTLOOK FOR GROWTH WEAKENS
The International Monetary Fund (IMF) says it expects global growth to slow from 5.9% in 2021 to 4.4% in 2022 and predicts growth will slow further in 2023, falling below 4%. Despite the US recording GDP growth of 6.9% in Q4 of 2021 the IMF expects a combination of falling monetary stimulus, ongoing Covid disruption and supply shortages to reduce output in the US by 1.6% from 2021 levels. China’s zero Covid policy and the effects of the debt crisis in its property market are also expected to continue to act as a drag.
More generally the IMF cited supply chain disruption and rising energy prices and their potential to contribute to inflation as potential headwinds for global growth. The price of oil was briefly above $90 this week as a shortage of supply continues to help push prices up. The IMF also flagged rising interest rates in the US as a major factor for Emerging Markets if the dollar continues to appreciate.
US: TECH STOCK SELL OFF CONTINUES
Equity markets continued to decline last week and US technology stocks were leading the way again as the Nasdaq Composite fell more than 3%. The trend was driven by concerns about the US Federal Reserve’s interest rate decision as well as generally lower market sentiment. Markets were expecting interest rate rises to start this week but the Fed indicated that it will implement the first increase in March and said subsequent decisions will be guided by future economic data. However, investors appear to think the Fed has become more aggressive and this further affected tech valuations.
This is not just hitting companies with very low current earnings. This week saw strong earnings updates from Apple, Microsoft and Tesla. Apple reported an 11% gain in profits for Q4 2021 and Tesla reported record profits of $2.3bn in Q4 2021. Microsoft also reported strong results and predicted more growth in its cloud-computing business. However, strong earnings reports were not enough to prevent them from being caught in the general sell-off that has seen significant falls in the value of tech stocks.
With the Nadaq falling at one point by as much as circa -15% over the past 2 to 3 weeks, we are now looking to buy in to this index at these considerably lower prices, but as stated previously with some degree of caution. Our view is that we believe we can “make” a profit of 5% to 6% in the fairly short term which we will then “take” and review trading levels against the macro-backdrop.
US: FED RATE RISE RATTLES MARKETS FURTHER
Equity markets endured a roller coaster ride last week as markets tried to get to grips with the US Federal Reserve’s approach to tackling inflation. The S&P 500 and tech-focused Nasdaq index are down between 1 and 3% this week but intra-day movements have been much more dramatic. Both before and after the Fed’s interest rate decision last Wednesday the Nasdaq moved 5% or more in each direction in a single day as investors tried to second guess the speed and timing of central bank action.
Despite growing expectations of a rate rise the Fed decided not to raise rates last week but signalled an increase will probably come in March. However, it was careful to point out that future decisions will be guided by what’s going on in the economy. Markets interpreted this as leaving itself more room to raise rates with some investors predicting up to 5 hikes this year. In contrast to equity markets, US government bonds were calm last week although the US dollar strengthened considerably after the announcement.
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Phil Simmonds LL.B(Hons), MBA, FPFS, Chartered MCSI
Chief Executive Officer | Solicitor (non-practising)
Chartered Wealth Manager | Chartered Financial Planner