Welcome to the Quarterly Investment Review Q1 2022. Our Investment team have put together a range of resources to update you on what has happened in markets across the first quarter of 2022. Here you will find:
- High-level, global equity performance analysis
- Soundbites from our team of investment experts
- A written summary covering the quarter's main market events
Global Equity Performance Analysis:
The below graph shows global equity performance across the quarter and plots world events along the performance line to indicate their impact on markets.
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Hear from our Team - Investment Soundbites
Hear from our team of Investment Managers as they each explore an important topic from the quarter, be that the war in Ukraine, inflation, energy securities or commodities.
James Penn, Head of Equity: Russia / Ukraine - The Impact of War
Chris Bell, Investment Manager: Rising Interest Rates and Inflation
Greg Easton, ESG Investment Specialist: Green for Energy Security
James Fitzpatrick, Head of Funds: Commodities - The Next Super Cycle?
Summary & Outlook - Q1 2022:
Equity markets have rebounded surprisingly quickly from the lows following the Russian invasion of Ukraine. UK, US, Europe, Japan and Hong Kong indices ended the quarter above 23rd February levels. With the build-up of Russian troops in the months prior, markets had acted to discount the likelihood that Russia would attempt to annex the eastern regions Donetsk and Luhansk, but few accepted that Putin would be foolish enough to launch a full-scale invasion.
On a global scale, Ukraine is a relatively small economy, but the sanctions imposed by western nations on Russia will result in a significant structural shift in world trade. Global GDP growth is expected to fall to 3.2% from 4% and, as large exporters of oil, gas and grains, the legacy of the war will be higher inflation in the form of energy and food costs. This has already fed into the data for February, with UK CPI rising 6.2% annually and US CPI rising 7.9%.
Europe will accelerate its investment into renewable and alternative energy sources to ensure its own energy security. This transition has its difficulties, with few viable all-weather, all-day alternatives and energy storage still in its infancy; it may take the best part of a decade. In the short term, liquid natural gas storage is being filled with the expectation of achieving 90% capacity by October, which is sufficient for Europe to survive the winter heating season without Russian fuels. NATO countries are compelled to increase their defence spending and will be conscious of protecting strategic resources.
Already grappling with a pandemic-induced demand shock, the global economy now faces a severe and extended supply shock and inflation is becoming ingrained. Central banks must act to bring down inflation and in doing so will be slowing the economy into an environment of heightened recessionary risk.
The Federal Reserve had already pivoted to a more hawkish stance in December, but with only three rate hikes expected in 2022. By early February expectations were for 7 or more and the Fed has now indicated it may hike in more aggressive increments. The BoE has raised rates twice and the ECB is expected to follow much sooner than previously expected. The combination of rising rates and inflation is a double whammy for bond duration risk, and we saw a sharp sell-off in debt during the first quarter.
US 10-year treasury yields have risen from 1.51% to 2.35%, UK Gilts from 0.97% to 1.66% and German Bunds from -0.18% to 0.64%. These are dramatic moves and yet real rates are at their lowest levels since the 70s. Investment grade credit has returned -5.5%, -3.9% and -5.3% for GBP, USD and EUR investors since 20th February 2020, before the pandemic hit capital markets. The returns are worse for higher quality credit, as they carry more duration risk.
Investors must seek to avoid these risks as we move forward. Inflation can be mitigated by real assets, such as property, gold and commodities, and equities; particularly those which exhibit pricing power, have good margins and strong economic moats. Rising yields may limit the prospects for fixed income, property, growth stocks and stocks which will need to refinance large debt piles. The overall result is a requirement to own more risk assets which will be more susceptible to recessionary risk. If we begin to see signs of Stagflation, physical commodities may become more attractive.
Equity markets fell in January with valuations beginning to suffer from rising discount rate expectations. Growth stocks experienced their worst monthly performance versus value peers in more than 20 years. Major equity markets also fell over the full quarter; US -3.4%, European -8%, Japanese -2.1%, Hong Kong -4.2%, mainland China -13.5%. The UK bucked the trend, up 1.7%, with a tilt towards value and good exposure to energy & materials. Despite the headwinds for growth, the NASDAQ ended the quarter falling only 7.5%, having fallen as much as 19.5% intramonth. Gold proved to be a better defensive asset than bonds, gaining 5.3% in US dollar terms, and physical commodities outperformed all other asset classes.
In contrast to the tightening cycle in the west, China appears to be entering an easing cycle but is also facing more lockdowns due to Omicron. Hong Kong tech stocks collapsed over two days in March before rebounding strongly, indicating level of resistance after 12 months of weakness. Emerging market assets, however, will likely carry a larger risk premium in the years ahead.
Disclaimer: The views, thoughts and opinions expressed within this article and soundbites are those of the authors/ speakers and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit
