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Capital Markets Update: April 2022

Octopus2 May 2022

Market updates from April

In a Nutshell

Inflationary pressure continued this month, as exports of commodities were hampered by Russia’s sustained aggression in Ukraine, and productivity stalled in China as Beijing continued to pursue its zero-Covid policy. This resulted in another difficult month for stockmarkets, with the notable exception of the FTSE 100 which increased 1.5% due to its weighting towards commodity stocks.

Commodity Concerns

As the Russian invasion of Ukraine tragically continued into its third month, many analysts now predict the conflict will be protracted and continue well into the following year, causing European markets in particular to remain low.

The expectation is that the Ukrainian economy will shrink 45% this year, and as a large agricultural exporter the World Bank has warned of a ‘commodity price shock’ similar to the 1970s, as food prices increased 37% year on year in April.

Exacerbating prices still further, Gazprom, the state-owned Russian gas company, announced it would suspend its supply to Poland and Bulgaria, with a wider threat of ending exports across Europe if support for Ukraine continued.

There was however some positive news in Europe, as France re-elected Emmanual Macron as president, defeating the far-right contender Marine Le Pen. This at least provided some stability for political leadership in the continent and provide reassurance for investors.

Living at Work

Multiple regions in China, including production-hub Shanghai, remained in lockdown in April, with fears that this would further spread to Beijing. As a result of these lockdowns China’s industrial output fell 2.9% from a year earlier, and retail sales fell 11.1% year on year. The continued restrictions on companies yet again kept pressure on global supply chains, and accompanying price rises.

To try to ease matters and ultimately reach China’s increasingly ambitious 5.5% growth target for 2022, several companies introduced a ‘Living at Work’ policy to continue production, with Tesla providing sleeping bags for its workers. Additionally, the People’s Bank of China pledged further monetary and fiscal support to businesses, resulting in a market bounce towards the end of the month.

Technology Slowdown

Data was released in the United States showing a further 431,000 jobs being added to the economy, with unemployment decreasing to 3.6%. However, in spite of this positive employment update consumer confidence remained low as inflation remained stubbornly high at 8.5% - a level not seen since the 1980s. There is now the expectation that the Federal Reserve will increase interest rates by 0.50% at least three more times this year to try to combat these pressures.

The tightening of public spending was reflected in underwhelming quarterly results for Amazon, posting its first loss in seven years of $3.8 billion, causing the share price to drop -23.9% this month. The fall in revenues was attributed to a slump in online shopping, and increased costs caused by supply-chain problems. Alphabet also posted weaker than expected earnings, with YouTube in particular receiving advertising revenue $640 million lower than anticipated, causing a fall of -16.8%.

Although disappointing for investors, with the S&P 500 decreasing -13.4% in 2022 to the end of April, it is worth noting the overall context of the markets in the years preceding, with gains of 28.9% in 2019, 16.3% in 2020, and 26.9% in 2021, excluding dividends. Therefore, for those adopting a longer-term view (as we would for any investments) we believe this recent reduction in share prices to be the reaction to over-inflated share prices rather than a fundamental problem.

Looking Ahead

As the pandemic continues to impact global supply lines, and Russian aggression continues in Europe, market volatility will remain heightened, and in the short-term global growth is likely to be restricted. However, we continue to believe that both of these factors are short-lived, and that by adopting a wide level of investment diversity in our portfolios that volatility will be tempered.

Important information:

The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation.

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