For financial professionals only
In a nutshell:
- US Tech stocks lead markets down
- The Fed pushes yields higher with further talk of tightening
- Political tensions rise in the UK and overseas
What’s moving markets…
What a frantic start to 2022… and I can’t see the rest of the year being too different.
Without quite saying it, Jerome Powell all but confirmed the Fed are ‘behind the curve’ when it comes to monetary policy. In other words, they ought to have started raising interest rates by now. If it wasn’t already, it now seems all but certain this will begin in March and won’t stop for a while. The market thinks so anyway, with at least 4 hikes now priced in for 2022.
The immediate reaction has been most severely felt in areas of the market that have most thrived on the many years of low rates and loose policy – namely, the US and the big tech names. To put it into context, the Nasdaq was down over 15% at one point last month.
Continued high inflation is a big reason central banks are feeling so much pressure to tighten policy quickly. The US and UK came in at 7% and 5.4% respectively for December. This should be close to peak levels. The rate at which CPI declines this year will be key to the extent and speed that conditions tighten.
The intense focus on central banks seems to have put Omicron firmly on the back burner when it comes to market reactions. The apparent mildness of this variant seems to have validated the ‘living with Covid’ thesis for now.
But as volatile as markets have been so far, UK politics has been worse.
An ever-reducing level of support and respect, combined with an ongoing criminal investigation surrounding lockdown parties, means Boris Johnson will likely remain under close scrutiny for the foreseeable future. We’ve seen the impact of politics on markets all too often, so watch this space with interest. That said, the UK market has fared well compared to other Developed Market peers so far this year. The FTSE 100 finally made it back to pre-pandemic levels by breaking through 7,500 points. Most other markets reached this feat quite some time ago, but it’s an important feat nonetheless.
We’re also watching the current situation on the Russia/Ukraine border. While insisting there are no plans to invade, Russia have amassed troops, tanks and artillery within reach of Ukraine. Geopolitics are often hard for markets to absorb and process, as the impact on businesses is not always clear cut. But the answer is usually volatility.
Asset class implications…
The markets’ adjustment to the expected 2022 rate rising cycle has seen yields rise sharply, particularly short-term numbers. The US 2yr treasury yield was up from 0.77% to 1.18% by the end of January, with the 10yr up from roughly 1.5% to 1.8%. The impact for existing bond holders has been painful, with the rate sensitive Gilt market the clearest example, down nearly 4% in January. The flipside being, as yield climbs, bonds become a more attractive asset class for those invested elsewhere.
Our tactical solutions remain underweight to Gilts, focused on giving additional protection to lower risk portfolios, but we have a keen eye on attractive entry points.
Growth stocks, where price is most reliant on distant future earning (and therefore the discount rate used) suffered badly relative to Value stocks last month. These companies have tended to do well in a low interest rate regime, so it’s unsurprising they’ve fallen further. The big question is whether this is the start of a trend. If so, there’s a lot of outperformance to potentially give back.
Regional variation is also of note in January, with some large differences across equity markets. However, it’s the outperformance of UK Income that really stands out. To return nearly 5% amidst the numerous headlines referencing ‘billions wiped off the stock market’ is quite something. And if January is an indicator for the year ahead, the unloved UK dividend market could be a useful allocation within portfolios, as highlighted in our 2022 Market Outlook.
Asset classes in numbers
| Name | 1m | 3m | YTD | 1yr | 3yr |
|---|---|---|---|---|---|
| FTSE Actuaries UK Conventional Gilts All Stocks TR in GB | -3.85 | -3.59 | -3.85 | -7.23 | 4.45 |
| ICE BofA Global Broad Market TR in GB | -1.32 | -0.68 | -1.32 | -4.20 | 4.21 |
| IA UK Direct Property TR in GB | 0.53 | 3.95 | 0.53 | 9.52 | 5.34 |
| FTSE All Share TR in GB | -0.33 | 3.95 | -0.33 | 18.90 | 21.66 |
| FTSE UK Equity Income TR in GB | 4.53 | 8.41 | 4.53 | 25.55 | 20.93 |
| FTSE USA TR in GB | -4.68 | -0.85 | -4.68 | 22.26 | 70.17 |
| FTSE World Europe ex UK GTR in GB | -5.20 | -3.32 | -5.20 | 13.76 | 41.17 |
| FTSE Japan TR in GB | -3.86 | -3.74 | -3.86 | -0.40 | 21.05 |
| FTSE Asia Pacific ex Japan TR in GB | -2.99 | -3.75 | -2.99 | -5.98 | 26.84 |
| FTSE Emerging TR in GB | 0.55 | -0.41 | 0.55 | -1.52 | 24.45 |
Source: FE Analytics, GBP total return (%) to last month end
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.