Inflation and developments in Ukraine continued to dominate the headlines in March. Expectations prior to the invasion had been that inflationary pressures would be about to peak, but this has been pushed out given the impact on a number of key commodity prices, not least energy. In addition, inflationary pressures are affecting economic data, causing a notable deterioration in the economic outlook, as businesses and consumers alike grapple with higher energy prices.
When does TINA Turner?
Inflation continues to trend upward, putting pressure on central banks.
Fed continue to talks of 7 rises in 2022.
War in Ukraine continues, with Russia seeming to struggle to make progress. Conflict prompts market volatility and drives a sharp rise in many key commodities.
NATO steps back from supplying offensive weapons.
Europe to start reducing dependence upon Russian oil/gas.
Abnormal near-term inflation, and prospect of moderating economic growth, triggers US 2 to 10-year yield curve inversion.
Change in interest rates and bond yields challenged highly valued “growth” companies.
Consumer remains in reasonable shape given property prices, savings and wage growth, but some cohorts will be impacted by cost-of-living crisis.
China signals “market-friendly” policies in response to market rout.
Markets sink and then recover strongly from intra-month lows.
UK and US equity markets rise above levels seen prior to Ukraine conflict, with US mega caps, notably technology, driving the recent recovery.
NASDAQ enjoys its best month since October 2021.
Asia and GEM remain out of favour.
Brent hits $139 before retreating below $100.
In spite of this, stock markets generally finished the month higher than where they started. With inflation above 6% and still rising in the UK and interest rates at 0.75%, investors are faced with a high real cost to holding cash, and as such, “TINA” (there is no alternative) has continued to support shares as the only asset class offering potential protection against inflation.
The response by central bankers has been meaningful, with guidance from the Federal Reserve (Fed) suggesting interest rate increases of 0.5%, rather than 0.25%, potentially at each of the next two Fed meetings, as well as a more aggressive approach to winding down its balance sheet of bonds. Unsurprisingly, this has seen an acceleration in the sell-off in bond markets, driven by both the prospect of higher-for-longer inflation and the probable response of central banks. In fact, the US 10-year bond yield, rose nearly half a percentage point in March, finishing above 2.3%, and has risen by the same amount since the end of March.
Some respite to the commodity prices has come from China, where their zero tolerance approach to Covid has resulted in a number of city shutdowns, latterly including the whole of Shanghai. Such actions briefly saw the price of Brent crude oil trade below $100, having traded above $130 earlier in the month, shortly after the Russian invasion.
The impact on both the cost of living, and indeed the cost of doing business, have become increasingly evident and March saw the expected sizable jump in the energy price cap for UK consumers. Unsurprisingly, such a backdrop is sapping the confidence of both, with businesses struggling with supply chain constraints, materially higher energy costs and a shortage of labour, and as such, higher staffing costs.
At a headline level, stock markets have been strong, yet much of the performance was driven by particular sectors, not least resources, pharmaceuticals and other defensive sectors such as utilities and telecoms. Given the uncertain backdrop and concerns around global growth, this makes sense, but the key question for markets in the coming months is at what point bond yields start to become a sufficiently attractive alternative to equities.
It is inevitable that at some point the current inflationary pressures reverse and start to subside, as markets respond to higher prices and supply and demand adjusts. Another key consideration is the impact of monetary tightening by central banks as they seek to cool economic activity to bring inflation back to target. It would seem likely that given the sizable difference between interest rates and inflation this point is yet to be reached.
Unemployment also remains extremely low with still no sign yet of easing, and as such, wage pressures continue.
In summary, stock markets have recovered strongly from their March lows, and remain well supported by ‘TINA’, but the sizable sell off seen in bonds serves as a reminder that at some point this support could diminish. Overall, we remain positive on equities for the coming months; although we will continue to closely follow bond market developments.
For an initial discussion about your investments, request a call back.
This document has been prepared for Ermin Fosse Financial Management LLP and is for information purposes only.
It should not be taken as advice and does not constitute a recommendation to buy or sell securities or to invest in any of the markets and/or sectors referenced. Unless otherwise stated, the source of statistical and other data is Alpha Portfolio Management, a trading name of R C Brown Investment Management PLC, Authorised and Regulated by the Financial Conduct Authority (registration number 146002). Registered in England and Wales (No. 2489639) at 1 The Square, Temple Quay, Bristol BS1 6DG.
This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Ermin Fosse’s services.
Please contact us before you invest / disinvest. The past is not indicative of future results. When you invest you may not get back what you put in. Errors and omissions excepted.
Ermin Fosse Financial Management LLP is authorised and regulated by the Financial Conduct Authority Financial Services Register No: 197438