Russian invasion continues to dominate markets with uncertainty
March saw the continued humanitarian crisis caused by the ongoing invasion of Ukraine by Russia, which, unsurprisingly, still dominates the markets. The lack of certainty, and ability to predict any outcome, with any degree of reliable interpretation, has the knock-on effect of extreme shifts in the markets. Unfortunately, at present, to say the markets are rattled is an understatement with the war being described as a “catastrophe” for the global economy as stock markets plunge.
Russia increasingly cut out of global economy
The Moscow Stock Exchange had to temporarily suspend its trading due to members suffering significant losses with global indexes, such as the MSCI and FTSE, both of which are going through the process of removing Russian companies from their listings. Experts assess the Exchange has collapsed more than 35% this year.
The loss in valuation of Russian companies has not been isolated to the Russian Index. Russian companies with a primarily London listing have seen their shares plummet. Mining stocks Evraz and Polymetal dropped from the FTSE 100, and Petropavlovsk left the FTSE 250 after its shares fell around 90% in 2022 to date.
High reputational cost of staying in Russia outweighs losses
Western companies are continuing to sever ties with Russia, viewing the reputational cost of staying to be higher than any loss of earnings. Oil companies BP, Shell and ExxonMobil, all with significant investment in joint ventures with Russian companies are withdrawing. Disney, Apple, Nike, Volkswagen, Toyota, Heineken, McDonalds, and banking groups Goldman Sachs and JP Morgan, have all halted operations in Russia.
Market disruption in all directions
The markets all remain in a state of flux, to varying degrees, due to the unprecedented uncertainty and resulting pressure on central banks around the world. Overall, global equities fell, with UK and European share prices weathering the biggest drops among developed markets, while US equities held out better.
However, the heightened volatility in equity markets almost pales in comparison to the disruption seen in commodities, largely due to the announced US ban on Russian oil and gas imports, and the UK’s plan to phase out Russian oil imports by the end of the year. The international oil benchmark Brent crude surpassed $100 per barrel, hitting a peak of $140 with other markets swinging wildly in response, particularly in those commodities affected by oil prices.
With regard to the debt markets, those investors who had sought safety in government bonds in a bid to escape tumbling prices from ever-increasing yields, only enjoyed temporary respite as inflationary pressure again brought rising yields causing bond prices also to fall. Extending that fall further was Chancellor Rishi Sunak’s budget update, announcing the Government would slash bond sales in the coming financial year.
Central banks tackle already high global inflation at different speeds
Central banks on opposing sides of the Atlantic, as well those in Europe, all seem to be heading in the same direction with interest rates, just at markedly different speeds. The Bank of England (BoE) and the US Federal Reserve both raised rates, which was expected in order to address rising inflation. The BoE increased rates from 0.5% to 0.75% announcing its latest prediction of 8% inflation by the end of June 2022. Meanwhile, the Fed increased rates from 0.25% to 0.5%, indicating rises for all six remaining meetings in 2022.
The Fed’s decision had the largest impact on the markets. Some analysts claim the move was hawkish, and the wrong call on inflation, predicting harder tightening on inflation to come, while others said it was a pro-growth move and soft on inflation.
Within the UK, there’s no doubt the BoE is firmly on its tightening path with three 0.25% rises already in the bank. And, despite inflation reaching 6.2% in February, its highest level since 1992, it still remains below that of the US, which is 7.9%, the highest in 40 years.
In Europe, even though inflation currently lags behind that of the US and UK, the European Central Bank (ECB) is now reportedly coming up to its first increase in interest rates, and markets are now expecting a hike in quarter four of this year.
Outlook for growth cut in April Statement
Chancellor Rishi Sunak presented a relatively strong picture of the government’s finances in the April Statementwith tax receipts boosted by rising inflation and government borrowing lower than expected. However, the outlook for growth has been cut from 6% to 3.8% by the Office for Budget Responsibility. The Chancellor announced measures to offset inflation, including a 5p reduction on fuel duty. He also raised the threshold for paying National Insurance, but stuck with the planned rise in the NI rate which means most workers will still end up paying more
Severe headwinds for China’s economy
Within emerging market equities, China has seen some extreme movements with March seeing it’s “most volatile week in decades”. The glut of negative influences, includes increasing fear Chinese companies could be delisted in the US, there could be more penalties in the offing for the tech giants, and the number of Covid cases is rising, along with localised lockdowns, due to China’s zero-Covid policy. All this adds up to an escalating situation regarding China’s property sector, and continues to cause considerable headwinds for the Chinese economy.
Second suspension of Evergrande trading
On the 21st March, trading in shares of Evergrande Group was suspended for the second time as markets wait for news of the company’s restructure. Currently the world’s most indebted property developer, Evergrande was declared officially in default in December and has debts of $300bn, owing around $20bn to overseas investors. The real estate developer is at the centre of escalating liquidity concerns across China’s property sector, where property contributes around a third of China’s economic growth and, as such, presents a considerable problem for the wider economic outlook of China.
|Cash||UT Cash/Money Market||00.00%||-00.03%||-00.05%||-00.03%|
|Gilts||FTSE Gilts All Stocks||-01.51%||-07.37%||-06.75%||-03.58%|
|UK Corporate Bonds||UT UK Fixed Interest||-01.83%||-08.24%||-03.61%||-02.73%|
|Intl Bonds||UT Intl Fixed Interest||-01.43%||-03.54%||-03.61%||-01.57%|
|UK Equity||UT UK Equities||-04.46%||-04.09%||-08.28%||07.13%|
|European Equities||MSCI Europe ex UK||-04.82%||-07.08%||-08.45%||06.93%|
|US Equities||S&P 500||-03.15%||-03.80%||-00.66%||16.45%|
|Japanese Equities||MSCI Japan||-00.87%||-05.96%||-05.73%||-03.12%|
|Emerging Markets Equities||MSCI Emerging Markets||-02.80%||-04.89%||-07.60%||-08.80%|
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