The news from Ukraine has been almost unbearable, and for the people of Ukraine, with no choice in the matter, truly awful. When it comes to financial markets, we must take a step back and consider how best to protect our clients’ interests.
Last week was indeed a wild ride for markets. Oil prices fell, natural gas prices fell sharply in Europe, albeit from giddy heights, and remain 300% up on a year ago. Equities rose in Europe but fell in the US, partially reversing the pattern seen since the crisis in Ukraine. Bond yields rose strongly, up 25-30 basis points on both sides of the Atlantic with the respective central banks sending distinctly hawkish signals given the need to tackle inflation.
Economists are cutting growth forecasts and there is talk of recession in Europe. China is also disappointing but for different reasons; they doubled down on their zero-Covid policy over the weekend, putting 17.5 million people in Shenzhen into lockdown in response to a tiny 66 new cases. I had been expecting a softening of this policy, so it was quite a surprise. Chinese equities were hit hard.
Wednesday a big day for news
We have another big week ahead. Watch out for Wednesday – it could start with a Russian sovereign default, continue with another hike from the Bank of England, and end with the US Federal Reserve starting its rate hiking cycle. Both central banks have stopped buying bonds and are set to begin selling. The ECB is going for a relatively fast taper of their bond buying.
So, what do we make of it all? I said last week that the time was drawing near to consider moving back into risk assets, but we weren’t there quite yet. And I retain that view. As economists cut their forecasts of economic growth, analysts will start to cut their earnings forecasts. Corporate balance sheets are strong but we will start to see sporadic defaults, for example by companies that are energy intensive and over leveraged.
Consumer squeeze could lead to recession; some big decisions for the Chancellor
Wages are accelerating in the UK and Europe, but prices are rising faster. The resulting consumer squeeze could lead to recession. Some economists are predicting that underlying growth in the UK will be so slow in the next three months that the extra bank holiday for the Queen’s jubilee could tip GDP into negative territory. Europe GDP growth could turn negative in the second half of the year.
With central banks forced to tighten policy in the face of high inflation, it’s up to fiscal policy to support the economy. There has been much talk in Europe but only limited action. Here in the UK, look out for leaks of tax cuts or increased government spending ahead of Chancellor Rishi Sunak’s announcement next week. He has some very big decisions to make.
A tough backdrop for Europe, brighter prospects for the US
All in all, it looks tough in Europe. The prospects for the US are brighter. The hit to real wages is less, energy prices are lower and there has been progress on the fiscal front. The best news of all is that headline inflation is close to a peak in the US. Yes, it is still way too high, and yes it won’t fall to the Fed’s 2% target any time soon, but the relentless rise to multi-decade highs may soon be over.
On the war in Ukraine, let’s hope that talks between the two sides produce a cease fire. That would be good news. But we’d still be a long way from replacing Russian energy on world markets or indeed achieving lasting peace and security in Ukraine.
Looking for an opportunity to move back into equities, but not yet
The news flow of late has indeed been bleak and markets have been battered. But longer term, the global economy will adjust. I expect that to involve higher bond yields and a period of weaker growth and market volatility. Equities remain my favoured asset class longer term and I am looking for an opportunity to move back in, but as I said earlier, not quite yet.
Past performance is not a guide to future performance. The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.
The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.
Many net zero commitments made by companies either implicitly or explicitly rely on carbon ‘offsetting’. We outline our principles on when companies should use carbon offsets and explore our engagement with businesses, especially in high impact sectors.
Our daily lives are becoming increasingly digitalised. Read our perspective on the opportunities and challenges this profound shift presents to businesses and some of the companies well placed to benefit.