The last couple of months of 2021 saw an uptick in volatility as the mood music in markets changed, which has continued into 2022. After years of both inflation and interest rates reducing and remaining very low, inflationary pressures surged and as a result there is upward pressure on interest rates to contain inflation. Inflation has been caused by a surge in demand for goods and services and a lack of supply and capacity in the system after the COVID lockdowns. This has been further heightened by the coronavirus lockdown in Shenzhen province in China and again by Russia’s invasion of Ukraine in the middle of February.
Markets have been volatile as investors have had to come to terms with the reality of the Ukraine invasion, as well as its second order impacts like sanctions, higher energy costs, and the confidence knock to an economic recovery.
Equity markets around the world fell by double digits during the quarter, although most have now largely recovered. At the same time, government bond yields have continued to rise and rise. The UK 10-year yield was 1% at the start of January and is now above 1.6%.
Portfolio Diversification is Key
We have made slight tweaks to the portfolios in the last couple of months, but still believe that growth and technology companies should recover once inflation is tamed, especially with their higher forecast rates earnings growth. In terms of geographical areas, the UK looks relatively unattractive, the recent outperformance has been driven by the large weightings in the oil and commodity companies in the FTSE, which now stand at elevated prices due to the war premium on oil. We believe in remains important to maintain diversification across the portfolio by both geography and business sectors.
Looking forward, we remain optimistic and positive about the outlook for markets over the medium term. We expect that the second half of the year to be rather better than the first, as inflation should reach its peak and roll over heading into 2023. Provided that central banks maintain a steady hand in respect of interest rate rises and quantitative tightening, equity markets should respond positively and rebound once geopolitical tensions ease.
Please note, our Market Overview & Outlook is our view of markets and does not constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. Overseas investments are affected by currency movements and exchange rates. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch, telephone 01392 875500, info@SeabrookClark.co.uk