The situation in Ukraine is still very fluid. Whilst there has apparently been some progress in talks towards a ceasefire in the last week, there is no guarantee this will be achieved. We have continued to see day to day price swings for both the equity and bond funds that we invest in and this has primarily been driven by news regarding the conflict. Volatility has continued to be driven by geographical proximity to the conflict, the degree of reliance on Russian oil and gas supplies and overall economic linkages with Russia. Russia invaded Ukraine on the 24th February 2022. Between that date and 16th March the MSCI World Index has gained 2.55% in Sterling terms and on a total return basis. This reflects its skew to US equities which are less exposed to the risks associated with sanctions on Russia and oil and gas supply pressures. This is also true for our investments in the iShares MSCI World Quality Factor ETF and Miton US Opportunities which have gained 7.94% and 2.97% respectively in the same time period. There has also been a “relief rally” in European equities in the last week due to the apparent progress in peace talks. The Invesco European Equity fund has gained 1.37% between 24/02/2022 and 16/03/2022. As a reminder, our portfolios all have 0% exposure to Ukraine and less than 0.50% direct exposure to Russian assets, running in the range of 0.22% to 0.32%. It is important to keep the big picture in mind and remain focused on economic data and the overall outlook for financial markets without discounting the current level of political risk.
Inflation continues to be the major macroeconomic risk. The US consumer prices index rose to 7.9%, a 40-year high, year-on-year to February. The latest data available for the UK is for January, where inflation rose to a 3-decade high of 5.5% year-on-year. The Bank of England has warned it could reach 8% in the second quarter of 2022, primarily because of the increase in the energy price cap in April. The rapid oil price rise brought on by Russia’s invasion of Ukraine has increased inflationary pressures even further in the short term, although Brent oil prices have come down from a peak of $129 on 8th March to $96 on 16th March. However, it remains a fact that Russia is the world’s third-largest producer of oil and second-largest producer of natural gas, so sanctions could continue to place upward pressure on prices, especially in the natural gas market where there is less available alternative supply. Additionally, food prices could rise, with Russia and Ukraine both being significant global exporters of both wheat and corn.
The Bank of England and the Federal Reserve have both raised interest rates in the last week in a bid to dampen soaring inflation. The Bank of England raised interest rates to 0.75%, its third recent increase. Over the pond, the Fed approved a 0.25 percentage point rate hike, the first increase since December 2018. The Fed also indicated there could be as many as 6 further rate rises in the coming year. We made some changes to the fixed interest fund selections within our Cautious and Cautious-to-Balanced portfolios in February in anticipation of higher inflation and incremental increases in interest rates throughout 2022.
Our Investment Committee is in regular contact. Our current strategy is to maintain equity exposure to leave investors positioned to pick up the benefits from up days in equity markets. It is important to keep in mind that we previously reduced equity market exposure by 7% in our Cautious portfolio and by 5% in our Cautious-to-Balanced portfolio in October 2021. Research from previous periods of substantial equity market volatility reveals that the best and worst days for equity markets tend to be clustered together, implying that it is likely to be a better strategy to remain invested and ride out the volatility than to attempt to engage in market timing and cut in and out. We also continue to favour geographical diversification within our portfolios to spread risks. Despite the recent increases in interest rates, sitting on the side lines in cash largely remains unattractive to us because in inflation-adjusted “real” terms a loss would be made.
This article is for information purposes only. It does not constitute advice and is not a recommendation to invest. The value of investments may go down as well as up and you may not get back your original investment. Past performance is not a guide to the future.
The information in this article is correct as at 17 March 2022
