MARKET COMMENTARY – MAY 2022

Market conditions have been challenging this year. The war in Ukraine, COVID lockdowns in China and rising interest rates to combat persistently higher inflation have weighed on sentiment. Throughout April, gold and natural resources including oil remained among the best performing assets, however, the month was marked by significant weakness across equities and bonds as well as heightened market volatility. Unlike the majority of global equity markets, the total return from the UK FTSE 100 Index remained marginally in positive territory for 2022 as the significant representation of companies in the energy and materials sectors contributed positively despite the difficult economic backdrop. US growth-orientated equities and smaller companies saw further losses in April as rising inflation and interest rates resulted in the momentum behind a shift in sentiment away from these areas of the market which have seen strong growth over the past ten years.

The ongoing conflict in Ukraine looks set to be prolonged and to continue to have a notable impact on energy markets. It is now starting to impact economic data with the longer term implications for the global economy uncertain. Unemployment rates across the UK and Eurozone are at all-time lows, however, consumer confidence has dropped to levels consistent with a recession. In response to soaring inflation in the UK, which reached a 30-year high of 7% in March, the Bank of England has raised interest rates four times since December 2021, the latest increase being on 5 May where rates were raised from 0.75% to 1.00%.

The peak in UK inflation is likely to come later than in the US or the Eurozone, and the consensus is that it could reach 10% by the autumn as Russia’s war in Ukraine boosts fuel and energy prices. The six monthly adjustment of energy prices means that the impact of the Ukraine conflict on oil and gas markets has not yet fully filtered through to consumers.

In the US, inflation reached 8.5%, its highest level since 1981 and interest rates were raised by 0.5% in May, making it the largest hike since 2000, following a 0.25% increase in March. The US Federal Reserve Bank signalled hikes of 0.5% at the next two meetings in an attempt to curb inflation. The 10-year US Treasury note yield breached 3.00% for the first time since 2018 and may rise further as investors demand higher compensation for holding long term bonds with inflation at current levels. Rising US yields have resulted in strengthening of the US dollar, which has been especially notable relative to sterling and the Japanese yen.

In spite of the negative news around higher inflation, the US economy remains in fairly good health overall with a low unemployment rate, rising consumer spending despite higher prices and most companies in the S&P 500 reporting earnings above expectations.

Chinese stock markets saw further losses in April. The outbreak of COVID-19 and policymakers’ response to prioritise the zero-COVID strategy over economic activity, resulted in all major cities being placed in full lockdown including Shanghai and Shenzhen. Given the significance of these cities in the supply chain, the situation is likely to exacerbate supply chain shortages, particularly in high-end manufacturing, technology equipment and semiconductors. Monetary and fiscal policy provided some relief, however, China’s growth target of 5.5% for 2022 now appears difficult to achieve. Valuations on Chinese stocks appear attractive relative to historical levels and developed equity markets, while Chinese 10-year yields have moved below US 10-year Treasury yields for the first time in over a decade.

The global economy remains supported by robust labour markets and high savings levels, however, the risks to a recovery are rising, most notably in Europe. Against the backdrop of tighter monetary policy and rising costs, companies with pricing power are likely to remain more resilient. Bonds, notably US Treasury Bonds are starting to become more attractive now, compared to their position at the start of 2022, but yields may still rise further as central banks continue to raise interest rates and the impact on inflation will be a key issue.

Total returns in GBP to 29/04/2022

* March 2022

Source of data: FE Analytics, www.bankofengland.co.uk, www.ons.gov.uk

The content contained in this article represents the opinions of MacIntosh & James Partners Ltd. The commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.