Market Commentary – January 2022

Global shockwaves for the markets

There has been a brutal sell-off within the equity markets, fuelling the narrative for January 2022 of market “shockwaves” and predicting a further bumpy ride ahead. From a pure macro perspective, this appears to be as result of the end of the ‘Covid cycle’ that has driven markets for the previous two years, and now leaves us with higher inflation as its parting legacy.

The inflation tightrope

There is now, for the central banks, a delicate line to tread on monetary policy. Inflationary pressure, which has been building for most of 2021, has now brought policy focus on the need for immediate and significant tightening. Interest rates have been increased, specifically to help bring inflation inline, which the Monetary Policy Committee (MPC) expects to reach 7% in the spring.

However, this is a balancing act for central bankers to avoid the very significant risk of a policy mistake, within what is already a volatile landscape. If interest rates are raised too much or too quickly, growth could choke as bankruptcies spike due to high debt burdens, but if action is too slow, there is danger of inflation becoming ingrained.

How interest rates affect equities

Market volatility is likely to remain higher than usual as a result of interest rate hikes, which experts predict will rise again this year. For equities, rising yields increase the discount rate on earnings, which disproportionately affects growth stocks such as tech companies.

Equities tend to act as a hedge for costs and inflation. When moving away from deflationary threats, as we did 12 months ago, equities usually perform well, particularly high-growth sectors such as technology. When inflation is near the target rate, equities still tend to perform well, with banks, cyclicals and value stocks usually leading in performance. But, when inflation is high and accelerating, most asset classes are at risk, including equities, due to the negative impact on both margins and multiples. At times of high inflation, commodities and defensives are often considered to provide the best protection. 

The COVID retail recovery continues

The Omicron variant of COVID-19 and ensuing surge of infections did not hamper UK retailers, many of which reported in January, strong Christmas period sales. Figures from the British Retail Consortium show relatively strong retail spending as the recovery in high-street sales continued, with retail sales 2% higher than in 2020. Not all retailers shared this recovery however; Curry’s PC World reported that supply chain disruption was a factor in its reduced overall sales, and Halfords sales were almost 3% below 2019 levels.

GDP expected growth trajectory

The UK economy rose above its pre-pandemic level for the first time in November 2021, with GDP growing by 0.6%, the fastest since June, as strong construction output added to the recovery in services activity. Services, which make up around 80% of the UK economy, saw output grow by 0.7%. Despite the slowdown in spending, rising fuel prices and still-rising inflation, the MPC expects the economy to continue its growth trajectory.

US inflation highest since 1982 

In December 2021, the US CPI (Consumer Price Index) reached 7%, its highest level since June 1982. Ongoing supply chain disruption, upward wage pressure, rising housing costs and elevated energy prices are all playing their interrelated parts in keeping inflation high.

US interest rate uncertainty and market volatility

The US Federal Reserve announced there would be a faster rollback of its asset purchase programme, which hit the equity and bond markets hard, seeing prices fall sharply. The markets expected interest rate rises to start this month, however, the Fed indicated the first interest rate increase would not be until March and from thereon would be guided by the data. Many investors are now predicting at least four US interest rate rises over the course of 2022.

Tech-stock drama

The heightened market volatility and recent sell-off was most clearly seen in the S&P 500 and tech-focused Nasdaq index. Tech stocks are highly sensitive to rising interest rates and the Nasdaq Composite is down more than 8% for January. Intraday trading movements have been dramatic, with the Nasdaq moving 5% or more in each direction in a single day, due to investors trying to second-guess the Fed’s next move on interest rates. 

The general sell-off within tech was not confined either to just those companies with low profits. January updates from Apple and Tesla of Q4 2021 reported an 11% gain in profits and record profits of $2.3bn respectively, yet they had been subject to drawdown of around 13% in January. 

COVID recovery fuels oil prices

Oil prices continue to rise strongly with Brent Crude hitting its highest price since 2014. The main factor contributing to the rise in demand is the fading fear of the Omicron variant of coronavirus and the accompanying failure of suppliers to meet the increase in demand. 

BP, Shell and John Wood Group have seen their stock prices rise as a result, with both BP and Shell’s shares up around 32% over 12 months. Although equities of these companies have recovered significantly as a result of the rally, they still remain below pre-pandemic levels.

China in need of its “monetary policy toolbox”

China’s GDP growth has slowed in Q4 2021 to 4%, down from 6.5% in 2020. The People’s Bank of China (PBoC) have cut interest rates for the first time in two years to help stimulate the economy, which is growing at its slowest pace in 18 months as the country deals with a programme of strict COVID-19 lockdowns, a slow property market and low consumer spending. The deputy governor of the PBoC has promised to open its “monetary policy toolbox” to stabilise growth. 

Geopolitical risks run high

The tension along the border of Russia and Ukraine, whilst building for months, now poses real risks of sanctions that will further exacerbate the European energy shortage, given Europe’s dependence on Russia for its natural gas and oil needs. Whenever there have been moments of increased tension between Russia, Ukraine, and the West there has been increased risk-aversion activity in the markets and periods of weaker stock market performance and the current state of play is no different. 

Global economy “a weaker position than expected”

The World Economic Update of the IMF (International Monetary Fund) for January says the global economy enters 2022 in a “weaker position than expected”. The IMF expects global growth to slow, from 5.9% in 2021 to 4.4% in 2022, and predicts growth will slow further in 2023, with contributors being falling monetary stimulus, ongoing COVID-19 disruption and supply shortages to reduce output. Also flagged, are rising US interest rates as a major factor for emerging markets if the dollar continues to appreciate as it currently is.

Asset ClassProxy1-Month3-Month6-Month1-Year
CashUT Cash/Money Market -00.02% -00.01% -00.04% -00.03%
Gilts FTSE Gilts All Stocks -03.85% -03.29% -05.93% -07.25%
UK Corporate BondsUT UK Fixed Interest -02.64% -02.74% -03.34% -00.86%
Intl BondsUT Intl Fixed Interest -01.53% -01.19% -01.84% -01.84%
UK EquityUT UK Equities -03.92% -02.53% -01.04%  14.48%
European EquitiesMSCI Europe ex UK -05.26% -04.36% -01.28%  11.70%
US EquitiesS&P 500 -04.35% -00.23%  06.47%  21.85%
Japanese EquitiesMSCI Japan -04.17% -05.79%  00.06% -01.62%
Emerging Markets EquitiesMSCI Emerging Markets -00.96% -02.25% -01.13% -07.73%
PropertyUT Property -04.35% -00.04%  02.00%  17.76%

Data Sourced from FE Analytics, and Bloomberg Finance LP.

*The value of your investment can go up as well as down, you may get back less than you originally invested. Circumstances are subject to change. Performance from the past or yields quoted should not be considered as reliable indicators of returns. This communication is for general information only and is not intended to be individual advice