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Capital Markets Update: March 2022

Octopus2 April 2022

Market updates from March

In a Nutshell

Following the price corrections seen across multiple markets at the start of the year, March saw a recovery across a range of sectors, particularly towards the latter half of the month, as hopes for peace talks between Russia and Ukraine continued, and China signalled further steps to bolster its international business. Further interest rate increases and balance sheet normalisations were announced by central banks to limit the impact of inflation, however it remains unclear for how long an inflationary environment will remain while events continue to squeeze production and global supply chains.

Market Movements

The start of March saw markets continue to decline, as volatility gained momentum due to Russia’s invasion of Ukraine, and many countries scrambled to impose further sanctions on Russia, looking to limit the use of Russian oil and gas in future. Brent oil prices almost rose to $140 per barrel – prices not seen since 2008, however by the end of the month it was reduced back to $106 per barrel after the White House signalled the US would release more of its reserves to ease any short term shortages.

However as the month progressed there was somewhat of a recovery seen in the US, UK and European markets after the meeting of the Federal Reserve in which the decision of increasing the interest rate was in line with what the market already had priced in. Towards the end of the month many Western markets had recouped some of the losses experienced a month prior, including the S&P 500 (+5.21%), NASDAQ (+5.94%), FTSE All Share (+2.64%) and Euro Stoxx 50 (+3.62%).

Shanghai Shutdown

China’s zero-Covid policy was tested this month with an Omicron variant outbreak causing the cities of Shanghai and Shenzhen to enter into lockdown, and cease manufacturing and any other non-essential work for at least a week. As major exporters for Chinese goods, this caused many Chinese and Asia Pacific stock prices to drop considerably, with the Shanghai Stock Exchange (SSE) falling over 12% in the first half of the month.

To limit these losses and encourage growth Beijing announced it would be more supportive of its companies listing overseas, improve its relations with US regulators for those planning to list there, and that it would pause its plans for a property tax, which had previously dampened prospects of its property development sectors. This caused markets to recover some ground, however even the larger winners from these moves such as Hong Kong’s Hang Seng index only returned to where it had been at the start of the month, and the SSE still closed -6.78% down from its original position.

Rate Raises

In response to rising prices the US Federal Reserve increased interest rates for the first time since 2018 by 0.25%, in the first of what is expected to be as many as seven increases this year to combat inflation. The Fed also announced an end of its asset purchasing programme, which aims to reduce the size of its balance sheet and thus tighten the liquidity conditions. Likewise in the UK the Bank of England increased interest rates to 0.75% in March in response to the increased costs of living, with expectation for many European banks to follow suit in the second half of 2022.

Previous predictions by the Bank of England had been that inflation would peak at just above 7.25% in April, however with continued rolling lockdowns in global manufacturing hubs, and further aggression from Russia and subsequent sanctions, it remains unclear how long these pressures will apply, and quite how high prices may be expected to rise before being brought under control once again.

Looking Ahead

Although further interest rate rises may be expected in the short term, these are likely to remain as fairly small incremental increases, so as not to quash economic recovery out of the pandemic.

With many known unknowns in play, including the development of the conflict in Ukraine and the continued effect of covid outbreaks, we would expect markets to remain more volatile over the short term until the situation becomes clearer. However, by investing in a diverse range of asset classes the potential for downside can be limited, and over the longer term we still expect that equity returns will outpace inflation, especially with real interest rates continuing in negative territory.

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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