At the turn of the year, we forecast a period of heightened uncertainty and deliberated on whether the market optimism was justified. Then of course, the Ukraine war was not on the agenda and our thoughts rightly remain with those caught up in the dreadful conflict.
The first quarter of the year has indeed been interesting. Global equity markets have fallen in general, although the UK as measured by the FTSE100 stood out with a marginal gain, reflecting the weighting in the oils and mining sectors. It may surprise some that January was in fact the worst month for markets, before the Russian invasion of Ukraine began.
There is no doubt now that last year’s optimism over whether inflation would prove to be transitory was misplaced. Short term risks remain to the upside and with that comes a greater chance of policy error from Central Banks. Steering a course to an economic soft landing has always been a very difficult balancing act.
Aside from geo-politics, Fixed Income markets, taking their lead from the price of Government debt, have held the key to how risk assets have behaved so far in 2022. However, further interest rate rises look to be ’priced in’ for the remainder of the year which is encouraging and falls in value have been limited in comparison with global equities.
Commodity prices, with oil at the helm, have risen sharply both prior to the invasion and since war broke out. Policy-makers are left grappling with how these prices will react to the cessation of conflict everyone desperately hopes for. Supply chains, only starting to recover from the pandemic, are once again under severe pressure not helped by further Covid lockdowns in several Chinese cities.
Rising prices risk hitting consumer spending and companies are unlikely to be in a position to pass all input costs through, resulting in a hit to margins. These are not normally the background conditions that lead Central Banks to aggressively raise interest rates.
The benefits of globalisation have helped fuel equity markets and driven down inflation for many years. The combination of the pandemic and the changing geo-political landscape suggests the world may have passed peak-globalisation. But that does not mean a reversion all the way back to the 80s.
The advance of technology has also contributed hugely to curbing inflation and improving the economic outlook. That will not abate. In addition, many companies are increasingly adept at adapting their businesses for disruption and change. So, whilst we are a little cautious, we can see past the plethora of concerns and position portfolios accordingly.
History is always a useful guide if not a perfect predictor of events to come. It does strongly suggest that when so much bad news is at the forefront of people’s minds much of it is already accounted for in valuations.