- Inflation continued to be elevated, prompting interest rate hikes from major central banks
- Russia’s invasion of Ukraine created a humanitarian crisis and caused stock market volatility
- The ongoing COVID-19 pandemic prompted lockdowns in Asia and disrupted supply chains
It was a challenging quarter for investors as high inflation, rising interest rates and Russia’s invasion of Ukraine all weighed on sentiment. While the pandemic and the Omicron variant of Covid-19 continued to affect economies and supply chains, it took a backseat during this time as most people’s attention focused on the return of geopolitical tensions as well as rising consumer prices and the response to this from governments and central banks.
Global stock markets were largely negative during this time as investors became concerned about the economic implications of Russia’s war in Ukraine as well as the degree of interest rate hikes that will be necessary to bring down inflation. Most major global stock markets fell over the past three months, including China, the emerging markets, Asia Pacific, Europe and the US. The UK bucked this trend and delivered positive returns, primarily because of good performance from financial, healthcare, oil and mining companies.
Economic update
Over the past three months, the main focus for the world’s major economies was inflation and rising interest rates, as well as the uncertainty brought on by the war in Ukraine.
In the UK, inflation soared to 7% in March, the highest level since 1992. The Bank of England (BoE) raised interest rates on two separate occasions in the quarter to 0.50% in February and then to 0.75% in March, in an attempt to rein in rising prices. The effect of higher inflation began to take its toll on consumers, with retail sales falling by 1.4% in March, according to the Office for National Statistics.
Likewise in Europe, inflation also proved to be an issue. The rising cost of energy was among the key drivers of inflation over the period, which peaked at 7.5%. With Europe receiving much of its oil and gas from Russia, being hit the hardest when energy prices soared in the weeks following the invasion of Ukraine; however, European Central Bank president Christine Lagarde stated that a decision on interest rate hikes would not take place until later in the year, when the bank expects to have completed its bond-purchasing scheme, which is also known as quantitative easing.
After much speculation, the US Federal Reserve (Fed) raised interest rates in March, nudging its benchmark rate into the range of 0.25 – 0.50%. This was the first time since 2018 that the Fed had lifted rates, with inflation and the rising costs of living both key factors in the decision. In the same announcement, the Fed stated that economic indicators and employment figures had continued to strengthen, while also indicating further rate rises throughout 2022.
In Asia, many countries continued to grapple with yet more Covid-19 outbreaks. This was most notable in China, where the arrival of the Omicron variant sent large portions of the country into lockdown, such as in Shanghai where residents were confined to their homes at the end of March. The area’s factory activity slowed down as a consequence, which in turn caused yet more disruption in global supply chains.
Meanwhile in Japan, Covid-19 restrictions continued to ease, with international travel into the country permitted for the first time this year. Restrictions on visiting bars and restaurants were also lifted, offering some positive news for the domestic economy. Despite this, the value of the Japanese Yen fell dramatically over the period.
Market commentary
The majority of global stock markets endured a challenging period over the past three months, owing in large part to concerns around inflation and the war in Ukraine.
In the US, conjecture over the US Federal Reserve’s shift towards a tighter monetary policy, alongside high levels of inflation and a move by investors out of high-growth technology companies, caused stock markets to fall.
The UK stock market fared better and, as a whole, generated positive returns, driven largely by companies in the financial sector, such as banks and insurers, as well as healthcare, mining and oil companies. That said, companies with more of a domestic focus performed less well. In Asia, Chinese stock markets performed poorly once again as Covid-19 and geopolitical concerns stemming from the Ukraine war rattled investors.
With interest rates rising, yields on benchmark government bonds went up sharply over the period (bond yields move in the opposite direction of prices). Corporate bonds underperformed government bonds and delivered negative returns.
