Market Update 25th February 2022
This week Russian President Vladimir Putin decided to declare a full-scale military assault on the Ukraine, although his decision to do so was quite evidently made some time ago.
The ending of the large-scale monetary stimulus that had been introduced to ease the economic impact of the pandemic restrictions was always going to throw up challenges for global stockmarkets, but just as investors became accustomed to the idea that rates are going to rise as a measure to dampen down the rampant inflation numbers and that to add further concerns to the tapering and planned end of QE, Russian President Vladimir Putin decided to invade Ukraine.
This unthinkable war and suffering within Europe might have been avoided if only the Biden administration and NATO had simply acknowledged Russia’s legitimate security concerns regarding Ukraine becoming a member of NATO right on their doorstep. The threat of sanctions from the West was never going to be enough especially considering Russia has an estimated half a trillion in cash reserves and, unlike the West, no government debt to service.
Nevertheless, the invasion has spooked many retailers to search for profits in the metaverse as the future of the global economy remains uncertain. Retailers such as Forever 21, Nike and Chipotle have been trying to create virtual world stores with hopes that it will boost real-world profits. Who would have thought that companies would sell you ‘things’ that are not real, – although that scenario has been quite the topic of consideration over the past couple of weeks as we have moved to confirm matters that are of interest to a number of clients pertaining to the Principality of Monaco!
GLOBAL: MARKETS IN TURMOIL
When Putin declared the invasion of Ukraine on Thursday, he justified it as an operation to ‘de-Nazify’ Ukraine and ‘defend victims of genocide’. Yes, that does sound rather odd, doesn’t it. The event shocked many politicians and economists, and also investors who felt that he would ultimately not risk ostracising Russia from most of the international community and all that might entail, as well as the people of Moscow, as Russia started what could be the largest conflict in Europe since the Second World War. The move came despite threats from major economies such as the EU, US and the UK warning to impose economic sanctions in retaliation to the invasion of Ukraine. However, these threats have been likened to bringing a peashooter to a gun fight.
Markets were taken by surprise, with equities around the world initially rattled as a result. The MOEX Russia Index plunged, falling as much as 45% at pre-market trading, and the Russian ruble fell to 87 against the US dollar. The European bond market increased while the yield on the 10-year US Treasury declined below 1.9%. Oil surged and the international benchmark Brent crude broke $100 a barrel while gold rose to $1,974 an ounce. However, despite the initial volatility, markets have recovered a good amount of their losses on Friday.
We as a firm are cautious but nevertheless optimistic for 2022. We have back-tested various blended strategic & tactical investment strategies which allow for various geopolitical and economic scenarios and the performance output data from these proprietary models are pleasingly robust across 3 of the 4 risk profiles we have applied the back-testing to, and we are working on the other with added scenarios just to add to the resources and research data that we might consider when putting together the ongoing rebalancing proposals for our clients consideration at any point in time to adjust to the evolving macro.
This year, with the expected increased market volatility due to the present geopolitical circumstances as well as the challenges of tapering, inflation and rate hikes, will require us to be both active and nimble as we look to bank modest but worthwhile short-term profits on a more regular basis. Identifying trading ranges and anticipated market behaviour to news flow will be important because as I said in previous newsletters, this is probably not going to be year to buy and hold if we are to achieve the returns required when factoring in the potentially negative real returns that inflation might otherwise bring to the purchasing power of our clients’ investments.
Whilst investment returns cannot be guaranteed, and acknowledging that there are prominent challenges to negotiate this year for the major global economies, we consider volatility to be our friend as it will provide us with opportunities to buy desired assets at better levels if we can make the right calls in avoiding some of the downside that the volatility also brings.
UK: END OF PANDEMIC RESTRICTIONS
UK business activity accelerated at its fastest pace since June 2021 as consumer services gained from looser pandemic restrictions and fading concerns about the Omicron variant of coronavirus. The latest IHS Markit composite purchasing managers’ index rose from 54.2 in January to 60.2 in February. The increase in output was led by a strong recovery in consumer spending on travel, leisure and entertainment. This was followed by Prime Minister Boris Johnson’s announcement to end all the remaining legal coronavirus restrictions in England, which further boosted the outlook for the UK economy.
Although businesses remain optimistic the latest consumer confidence report suggested that consumers have become more reluctant to spend their money due to rising living costs as the price of food, fuel and utility bills continue to rise in the UK. The consumer confidence index fell seven points to minus -26 in February as rising living costs hit morale, which was recorded before Russia invaded Ukraine.
CHINA: ALIBABA SHARES TUBLE
Chinese e-commerce company Alibaba (China’s equivalent to Amazon) reported its slowest quarterly sales in the fourth quarter of 2021 due to rising competition as well as the effects of Beijing’s regulatory crackdown on technology companies. The total revenue grew 10% to $38bn between October and December 2021 which is the lowest figure seen since the tech group had its first public listing in 2014. Alibaba’s chief executive Daniel Zhang said the results were a result of China’s slowing economic growth and sliding retail sales due to coronavirus as well as increasing competition from other e-commerce groups.
Alibaba’s shares have been losing value since November 2020 after the Chinese authorities first imposed regulations following claims of the company’s abuse of user data and monopolistic business practices. Shares fell a further 8% since the company announced its most recent profits. Other e-commerce groups, such as Pinduoduo and JD.com, have also seen their share prices falling since the government first started to impose regulations.
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.
Philip A. Simmonds LL.B(Hons), MBA, FPFS, Chartered MCSI
Chief Executive Officer | Solicitor-Advocate (non-practising) Chartered Wealth Manager | Chartered Financial Planner