Rising inflation, interest rate hikes, and war – the challenges of Q1 2022

The beginning of the year has proved to be a bumpy ride for investors to say the least. Factors such as soaring inflation, interest rate hikes, the war in Ukraine and a Zero Covid Policy in China have all contributed to the global market sell-off.

Geopolitical uncertainty

The humanitarian disaster has had a significant bearing on investment markets. The most considerable economic effects so far are the soaring food and energy prices.

Prior to imposed sanctions, Russian exports accounted for:

  • 13% of global crude oil production
  • 17% of natural gas production
  • Almost a tenth of global wheat supplies.

European natural gas prices rose by 15% in February this year. Higher energy prices will continue to fuel higher and more persistent inflation. In turn impacting companies’ profits and eating into household incomes.

An agreed partnership between the European Commission and the US to reduce Europe’s reliance on Russian energy could relieve some of the pressure later this year. Meanwhile, the US will aim to deliver larger shipments of liquefied natural gas to cut the European Union’s dependency on Russian gas by two-thirds this year and end it before 2030.

Inflationary issues

Inflation was inevitable as the globe moved back towards a world we were accustomed to pre-pandemic. Demand for goods and services has rocketed, but the supply of these goods and services has struggled to keep pace with demand. Disrupted supply chains continue to struggle to get back on track.

As it stands, inflation in the UK is running at its highest level for over 30 years and is expected to breach 10% before the end of the year. The inflation picture in the US is not too dissimilar, running at a 40-year high with reported inflation at 8.5% in March.

Policy response

Central banks have shown little let-up in their tightening plans, adding further pressure to financial conditions that have become less accommodating in the face of the situation in Ukraine.

The US Federal Reserve (Fed) and Bank of England (BoE) have both hiked rates three times already this year. The US increased rates by 0.5% in early May, the largest rate hike in the US in two decades with their base rate now running at 1%. The UK base rate is also now at 1%, again the highest it has been in over 13 years.

Meanwhile, the European Central Bank (ECB) struck an aggressive stance by bringing forward the date they expect to end their bond-buying programme. They did this despite Europe’s reliance on Russian energy and the damage to supplies caused by the war.

The ECB followed this news with an announcement that interest rate rises should be expected.

Consumer confidence

The rising cost of living is having a knock-on effect on consumer confidence. Concerns about inflation and the war in Ukraine have driven US consumer confidence to an 11-year low.

A consumer sentiment report from The University of Michigan found that confidence declined in March due to falling real incomes, which recently accelerated as fuel prices rose sharply.

Despite these significant challenges, employment statistics indicate that US businesses remain strong. The unemployment rate fell to 3.8% after firms took on 678,000 workers, far higher than the 400,000 expected, according to the Bureau of Labor Statistics.

Global equities remain at depressed levels having fallen by 13.49% as at the end of April, with sectors such as technology much lower than this. The US NASDAQ tech index has taken a real hammering and finished the period down 21.16%.

While many of the above concerns remain present, they appear to have been priced in by investors and in some areas, oversold.

As we move towards the second half of the year we will have a better understanding of the longer-term environment for inflation, central bank’s policy and the state of peace talks between Russia and Ukraine. As and when these factors become more settled, markets should return to a happier state.

In the meantime, company earnings have continued to reinforce the strength and resilience of certain economies and their underlying companies.

We encourage those with exposure to investment markets to rise above the noise and keep their heads. While selling out of equities might provide some short-term emotional relief, it is patience and discipline that markets reward in the long run.

If you want to ensure that your investment portfolio is ready to perform against unpredictable volatility while aligning with your financial goals and appetite for risk, please get in touch.

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Our portfolios are positioned to benefit from long-term economic and investment trends, and we favour areas of the markets that have long-term growth potential with manageable risks.

If you have any questions about your own portfolio or want to find out more about how we can look after and grow your wealth, please don’t hesitate to get in touch. Email us at enquiries@bowmoream.com or call 0203 617 9206.

 

This blog is for general information only and does not constitute advice.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Bowmore Asset Management Ltd is authorised and regulated by the FCA.

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