Investments | 12 May 2022

MONTHLY UPDATE: FINANCIAL MARKETS STILL NAVIGATING VOLATILE CONDITIONS

Financial markets are experiencing further challenges as Russia’s invasion of Ukraine continues, China introduces more lockdowns and investors fret over central bank measures to tame inflation.

IN A NUTSHELL

  • April was another challenging month for investors, with asset classes across most regions falling in value, and those challenges have continued this month. Central banks on both sides of the Atlantic are accelerating interest rate hikes to tame rising inflation, which makes the outlook less predictable.
  • At the same time, the ongoing effects of the Ukraine invasion, particularly high oil and gas prices, and lockdowns in China threaten to slow economic growth.
  • Central banks are aware of these risks and are facing a tricky balancing act – trying to increase interest rates just enough to cool inflation without stunting growth.
April is traditionally a good month for stock markets, but this year’s uncertainties overcame tradition. Rising interest rates on the back of the Ukraine invasion and strict lockdowns in China are all contributing to a less predictable outlook and more fragile market mood.
 

Sven Balzer, Head of Investment Strategy, Coutts

The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs. 

POSITIONING OUR CLIENTS’ INVESTMENTS

Our relative bond positioning has helped cushion our portfolios and funds somewhat from the falls in bond markets. In particular, we have a reduced allocation to investment grade corporate bonds (which have struggled), and our active position in Chinese bonds has held up.

Our exposure to the healthcare sector has performed relatively well. These investments have outperformed other more volatile parts of the market, and we believe this sector is better supported in the current environment.

We recently bought more UK stocks and reduced exposure to growth style equities. For years we have held a comparatively large number of UK equities, and the market’s higher exposure to inflation-linked sectors like energy, and defensive sectors like healthcare, is proving beneficial. Growth stocks, meanwhile, like technology, have struggled.

Our clients can see the latest performance of their own portfolios or funds by speaking to their private banker or visiting Coutts Invest.

MARKET MOVES THAT MATTERED

  • We have an unusual situation right now where economic growth is slowing while inflation is rising – usually rising prices are a sign of a strengthening economy. At some point something’s got to give. Either inflation will peak, reducing pressure on central banks to raise interest rates, or economic growth will slow so much central banks won’t want to raise them anyway, preferring instead to stimulate their economies. We still expect inflation in the US to fall over the second half of 2022, but markets are likely to stay volatile in the meantime. UK inflation looks set to remain high for most of the year, and the Bank of England has become more outspoken about the challenges this may present to UK consumers.

  • The Bank of England recently issued a stark, although very speculative, warning about the UK economy, saying it could shrink rather than grow in the last three months of this year. But the country’s international stock market is driven by different, less domestic factors – as are the large companies we mostly invest in. We’ve believed for some time that the UK economy was at risk of economic slow-down this year, and have reduced our exposure to smaller companies which are more vulnerable to this.

  • China’s zero covid policy is dragging down economic activity, but the authorities there appear committed to supporting a steady pace of growth – be it through direct financial support for its people or moves to stimulate broader economic expansion. Its central bank recently announced a spate of measures, which include urging more lending to people with “flexible employment”, such as taxi drivers and online shop-owners, and providing longer-term, cheaper loans to small businesses.

Coutts investment clients can find out more about the latest market movements and what they mean by contacting their private banker. Our experts’ views on current market trends can also be found on our insights page.