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Capital Markets Update: February 2022

Octopus8 March 2022

Market updates from February

In a Nutshell

The news this month was dominated by the decision of Vladimir Putin to invade Ukraine. This act of aggression further hastened the shift of investor sentiment to value stocks and traditionally safer asset classes, and move away from more speculative, growth stocks which have been favoured in recent years

The implementation of sanctions, and the prospect of a potentially drawn-out conflict in Europe with neighbouring Russia caused global prices for oil, gas and commodities to increase further as further disruption is expected for a while yet.

Energy exit

Concerns over reduced access to Russian oil and gas, including the move by Germany to halt the certification of Nord Stream 2, lead to Brent oil prices surpassing $100 per barrel – levels not seen since 2014. To lessen the impact members of the International Energy Agency released 60 million barrels of crude from reserves, however as demand continues off the back of covid restrictions being lifted prices remained stubborn.

With energy prices contributing significantly to the recent inflationary pressures we have seen globally, further moves have been made to increase interest rates in response, with the Bank of England issuing a further rise to 0.5% in February.

The moves to sanction Russia and to reduce other countries’ dependence on its gas reserves have also brought into focus the benefits of renewables in enabling greater energy independence, and it is hoped by many that these events may accelerate the transition to sustainable energy practices.

Market winners

The FTSE remained resilient this month compared to other major indices, only reducing -0.5%, compared to the S&P 500 (-3.0%) and MSCI Europe Ex-UK (-4.1%). This was in part due to the index’s diversity, including energy companies which benefit from increased prices, and the continued success of mining and materials companies which have benefited from increased post-pandemic spending.

In the materials sector for example Glencore increased 12.4% this month, and Rio Tinto increased 8.5%. The latter recorded its highest ever annual profit in February, with earnings growing 72% in 2021 due to increased iron ore prices and strong global demand. In response, a record full year dividend was declared of USD$16.8bn.

Encouraging results

Although the S&P decreased for the second month in a row, fundamental business and consumer data remained encouraging in the US. January retail sales surpassed expectations, by rising 3.8% from December despite concerns over the spread of the Omicron variant and additional lockdowns. Similarly the January jobs report was also encouraging, noting a further 467,000 jobs added, with unemployment only at 4%.

Additionally, the S&P 500 reported earnings growth of over 30% for the fourth straight quarter. These results indicate that despite the recent correction in prices, the index constituents remain in a fairly strong position, and these companies are likely able to weather the current headwinds over the longer term.

Looking Ahead

We sincerely hope for a quick de-escalation and resolution for the situation in Ukraine. We are very much saddened by the invasion and the resulting humanitarian tragedy that is now unfolding.

While this continues, however, we expect markets to remain volatile, and it is in this environment where investment diversity is necessary to ride it out, and limit the impact on one’s assets.

Aside from this, the actions and reactions of central banks to rising energy prices, and with it inflation, will be a determining factor in how markets will move in the short term this year, and we will continue to watch with interest.

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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