2022 so far has been anything but plain sailing for markets. There’s been a whole host of events for investors to swallow – and as an investor yourself, you’ve probably got a lot of questions on your mind right now. Hopefully we can answer some of those today.
For April’s Skipton Insight we speak to Mark Butterworth – Head of Financial Advice, Planning & Research here at Skipton. He provides us with the latest insight on recent market events and what it could mean for you as an investor.
What’s does Russia’s invasion of Ukraine mean for markets?
Russia’s invasion of Ukraine in late February shocked the world. So far, the crisis is having a humanitarian impact that it’s hard to find the words for. And our thoughts continue to go out to those affected.
Not taking away from the awful scenes we’re seeing, there are also economic and financial implications too. When the conflict first unfolded, markets were receptive to the fast-flowing news on the crisis – causing a lot of ups and downs across global markets, particularly in Europe. Although – sadly – the war still rages on, since the end of March the market outlook has proved more positive, with some areas even back above their pre-war levels.
Russia’s domestic stock market has crashed. On the day of the invasion, markets there fell by about 50% from their October record high– that’s the largest fall on record. Although we would like to remind you at this point that the direct impact on Russian markets is miniscule when it comes to your investments – Russian assets make up less than 1% of an overall portfolio.
As you're probably aware, the energy market has also been affected. Russia is a significant exporter of commodities. It provides around 12% of global oil supply, 17% of natural gas production and more than 18% of global wheat supplies. Oil prices initially soared – with the commodity briefly reaching its highest price since 2008 at $130 a barrel. This price has since dropped back down, and oil is currently hovering around the $105 mark.
In the first few weeks of the invasion, investors headed towards the lower risk options which tend to keep their value when things get a little shaky. Gold and other precious metals like platinum and silver also experienced price rises, although as can be seen from recent market performance, shares have started to pick back up once again.
“Western nations continue to impose economic sanctions, not only on Russian commercial banks and prominent individuals, but also on the Central Bank of the Russian Federation. In addition to this, there are numerous trade embargos on all sorts of industries, from pharmaceuticals through to technology and airlines.
"The evolution of the conflict remains uncertain. As this stage the clearest impact on developed markets is through food and energy prices. It’s looking like higher prices will fuel further – or at least more persistent – inflation.”
This brings us nicely to our next question.
What’s going on with inflation?
The cost-of-living squeeze on both sides of the Atlantic has just got worse. Prices have been rising briskly for many months now. In February, US inflation hit 7.9%, its highest level since 1982. Here in the UK it reached its highest level in 30 years in February, standing at 6.2%.
Mark states, “At the start of the year markets’ biggest fears were that the post-Covid surge in prices would be embedded by rising wage demands. Aside from this, markets had priced in a short, sharp rise and then a fall in prices – as supply chains bounced back from the pandemic.
“But economists now warn that the price of a host of crucial resources and commodities – already elevated in the aftermath of the pandemic – could rise even further due to Russia’s invasion of Ukraine.
“As a result, markets are beginning to factor in prices going even higher and for even longer. Food and fuel are two areas to keep a close watch on. Prices on petrol forecourts have already spiked, and with both Ukraine and Russia being top exporters of grains and vegetable oils, food is expected by many to follow suit.
“UK households are already dealing with rapidly rising bills. The cruelty of rising food bills is that those on low incomes are likely to spend a higher proportion of their income on them, so price rises hurt them the most. And with a significant household energy bill increase kicking in this month, inflation readings in the UK are likely to climb higher before they come down.”
In terms of how all this impacts markets, Mark adds, “There are pockets of asset classes which tend to benefit from rising inflation – such as financials and energy companies. This includes value-style stocks in general, which are companies that are seen to be undervalued in the marketplace.
“But, as with many market themes, it’s swings and roundabouts – meaning there are also areas which don’t benefit from high inflation. These typically fall under the category of growth-style stocks, which investors tend to pay a higher price for, in hope they will offer good levels of growth later down the line.”
Rising inflation poses a big problem for central banks – so the question is, what will they do about it?
Central banks and their planned actions have very much been overshadowed of late. But it’s a factor which dominated at the start of the year, and despite other events taking over, remains an important one for markets.
In January, expectations were that the number of interest rate hikes to be delivered by the US Federal Reserve and the Bank of England would be ramped up quickly – and so far this view remains.
The Bank of England fired the starting gun on raising interest rates last year, and in March it made the decision to raise rates to their pre-Covid levels. The quarter point rise in US rates came as no surprise, and the market remains prepared for an aggressive hiking cycle over the course of the year from the US Federal Reserve.
The European Central Bank has lagged its peers so far, but the main notes from its March meeting indicate that policymakers expect to begin tightening sooner than expected in response to the latest price pressures.
Mark states, “The developments in Ukraine present central banks with a tough question. Do they continue down the path towards tighter monetary policy to fight higher inflation, or do they pause and take stock given the new risks to economic growth?
“The answer will largely depend on the extent to which higher energy prices dampen growth or, alternatively, fuel strong wage rises as workers try to protect their purchasing power amid a tight labour market, where businesses are struggling to recruit.”
Mark adds, “On balance, it could be that a moderated policy tightening will provide much-needed support for markets in a very uncertain time. And as we’ve mentioned before, it’s important central banks don’t shock investors with their actions – this way, markets should be able to handle rate hikes without too much panic.
We’d like to remind you that we’re here for you
Whether it’s in the form of the awful events we’re witnessing in Ukraine, in the guise of a global pandemic, or in the form of Brexit - more often than not there’s something going on in the world which will impact markets in one way or another.
Mark concludes, “We live in a blizzard of 24-hour news schedules, which means it can be difficult to think longer-term – but if I could ask you to take one thing away from this month’s Skipton Insight, it would be to do just that: remain committed to those long-term goals that led you to invest in the first place.
“As a Skipton customer it’s important to take comfort that you hold a balanced and diversified portfolio invested in a wide range of assets, suited to your circumstances – for example, your portfolio will hold a mixture of growth and value-style shares.
“It means the fortunes of your portfolio aren’t solely tied to the ups and downs of stock markets. Instead, it relies more on the long-term performance of markets.”
While the Russia-Ukraine conflict will likely remain uncertain time for some time, we believe times like these call for a cool head.
When the fear of war is added in to rising rates and high inflation, it’s natural to question whether you should continue to invest. But it’s important to take a moment and avoid making any decision fuelled by emotion.
It’s also worth remembering that some of the worst short-term market fluctuations and losses are immediately followed by days or periods of the best recoveries. That’s not to say a significant decline will always be followed by a quick and short recovery. However, it’s a reminder that markets can be fickle – especially over the short-term – which is why the long-term performance of your portfolio should be your ultimate destination.