Inflation has already passed 6%, which is the highest level seen in the UK since 1992 and it is expected to increase and reach around 9% later in the year.
How is Russia’s invasion of Ukraine impacting markets?
First and foremost, our thoughts and prayers are with the people of Ukraine who have endured terrible suffering and loss. We wish for a peaceful and diplomatic resolution. In the context of financial markets, the events that have unfolded in Ukraine are exacerbating the pre-existing trends of rising inflation and slowing economic growth.
What is the impact of rising inflation and slowing economic growth?
Inflation has already passed 6%, which is the highest level seen in the UK since 1992 and it is expected to increase and reach around 9% later in the year. This is from a place where inflation was below 1%, only a year ago, intern forecasts of economic growth this year are being revised downwards as energy prices, the cost of raw materials, interest rates are all on the increase, which is a significant headwind for both the consumer, and to companies. Central banks are therefore walking a tight rope as they battle to control inflation without overstepping the mark and ultimately tipping economies into a recession
How have stock markets reacted to this challenging environment?
Stock markets had a tough period in January and February, but they showed some signs of recovery in March. The UK was the best performing major stock market over the quarter, but it only posted a modest gain with its heavier weighting of large oil and mining companies that have done very well as of recent. However, most UK fund managers struggled to keep pace due to their investments in more domestically focused and economically sensitive, medium and smaller size companies, which have struggled on a share price basis.
Looking internationally, the technology-heavy US equity market experienced a sharp sell-off. as stocks on high valuations saw large corrections. However, the European and Chinese stock markets suffered to a greater extent due to Europe’s high dependency on energy and trading links with Russia and we saw further COVID related lockdowns in China.
And what transpired in the Bond Markets?
Yields in the bond market rose in response to higher levels of inflation. This meant that investors in UK government bonds lost more than 7% in a single quarter. Investors in the UK corporate bond market lost around the same with international bonds faring much better for Sterling based investors. Although yields are higher and therefore more attractive than they were, yields on offer are still far lower than inflation so investors are losing money in the bond market in real terms. However, slowing economic growth should lend some support to the prices of bonds, but we do expect returns from the bond market to be modest over the coming year.
What is the outlook for financial markets?
Having perhaps painted a bleak picture, financial markets tend to have a way of recovering and offering solid long-term returns. We are keeping a close eye on any signals of recession. However, our current strategy is to remain fully invested in markets with subtle skews to our preferred areas. In the equity book, we have a bias toward high-quality companies that can pass on the effects of rising input costs onto their customers. And in the bond markets, we have a preference for corporate and international markets. And we continue to make good use of tactical and strategic bond funds that can swiftly capitalize on opportunities as they present themselves.
Park Hall Financial Services Limited is authorised and regulated by the Financial Conduct Authority.
The information within this article is for information purposes only and does not constitute investment advice. They represent the opinions of the fund manager and those of Square Mile. It does not contain all of the information which as an investor may require in order to make an investment decision. Any reference to shares/investments is not a recommendation to buy or sell. If you are unsure, you should seek professional independent financial advice.
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