Quarter 1, 2022 Market Commentary

• Published on April 11th, 2022

Quarter 1, 2022 Market Commentary

Past performance is not indicative of future results. The information mentioned is for illustrative purposes and should not be considered a recommendation to buy or sell.

Russia's invasion of Ukraine in late February caused a global shock. The grave human implications reverberated through markets, leading to declines in equities and rising bond yields (indicating falling prices). Commodity prices surged as Russia is a key producer of oil, gas, and wheat, contributing to further inflation and supply chain disruptions. Chinese equities were negatively impacted by renewed COVID-19 outbreaks, resulting in new lockdowns in major cities.

US

US stocks declined in Q1. The invasion of Ukraine drew widespread condemnation and led to strict sanctions from the US and its allies. President Biden targeted Russia's economy by banning Russian oil imports.

Sanctions also hit the Russian financial system, freezing assets of the Russian central bank and blocking access to the global financial system. Wealthy Russians faced asset freezes and seizures, while major international corporations withdrew from the country. Additional sanctions were also implemented.

The invasion amplified concerns over inflation, particularly in food and energy, although US economic data remained stable. The unemployment rate dropped from 3.8% in February to 3.6% in March. Wages continued to rise but did not keep pace with headline inflation, which reached 7.9% in February.

The Federal Reserve (Fed) raised interest rates by 0.25% and signaled further hikes throughout 2022. Energy and utility companies outperformed the falling market, while technology, communication services, and consumer discretionary sectors were among the weakest.

Eurozone

Eurozone shares fell sharply in Q1 due to the region's close economic ties with Ukraine and Russia, particularly in oil and gas reliance.

The invasion caused a spike in energy prices and fears about supply security. Germany suspended the Nord Stream 2 gas pipeline approval from Russia. The European Commission announced the RePowerEU plan to diversify gas sources and accelerate renewable energy deployment. However, high energy prices could weigh on business and consumer demand, affecting economic activity.

Energy was the only sector to register a positive return, while consumer discretionary and information technology saw steep declines. Consumer spending concerns and supply chain disruptions, exacerbated by the war, led to declines in retailers and tech stocks.

The European Central Bank (ECB) outlined plans to end bond purchases by September and indicated a potential interest rate rise later in the year. Eurozone inflation reached 7.5% in March, up from 5.9% in February.

The ongoing war and rising inflation led to a slight pullback in economic activity measures. The flash eurozone composite purchasing managers' index (PMI) slipped to 54.5 in March from 55.5 in February, still indicating expansion.

UK

UK equities were resilient as investors priced in the additional inflationary impact of Russia's invasion of Ukraine. Large-cap equities in the FTSE 100 index rose, driven by oil, mining, healthcare, and banking sectors. Banks benefited from rising interest rate expectations as the Bank of England hiked rates ahead of other developed market central banks.

Defensive sectors advanced, but fears of a global recession drove periodic sell-offs in these stocks. Market volatility increased due to uncertainty related to the conflict.

The Bank of England raised its official rate by 50 basis points (bps) through two consecutive 25 bps hikes, following a 0.15% increase in December. Consumer-focused areas and growth potential sectors underperformed, driving poor performance from UK small and mid-cap equities.

The Office for Budget Responsibility (OBR) forecasted UK consumer price inflation to peak near 9% this year, expecting CPI to hit 8.7% in Q4 2022 before falling in Q1 2023. Chancellor Rishi Sunak announced measures to support consumers alongside the Spring Statement.

Japan

After weakness in January and February, the Japanese stock market rose in March, ending Q1 just below its end-2021 level. This was despite changes in US interest rate outlook, the war in Europe, and higher energy prices.

The release of US Federal Reserve meeting minutes and expected interest rate hikes set the tone for the equity market. Value-style stocks, especially financials, outperformed growth stocks.

Geopolitical events dominated market behavior from February onwards. Although geographically close, Russia is a small trading partner for Japan. The yen weakened sharply against major currencies, reaching a six-year low against the US dollar.

In late March, the Bank of Japan conducted fixed-rate bond purchase operations to keep bond yields within the target range, signaling its intent to maintain current monetary policy.

Asia (ex Japan)

Asia ex-Japan equities experienced sharp declines in Q1 amid a volatile market environment as Russia invaded Ukraine.

Chinese shares fell sharply due to renewed COVID-19 outbreaks. Hong Kong and Taiwan also saw declines. Shanghai entered partial lockdown to curb Omicron cases, raising fears of broader lockdowns.

South Korean shares also declined due to pandemic impacts. Indonesia achieved solid gains, while Thailand, Malaysia, and the Philippines posted more modest gains.

Emerging Markets

Emerging market (EM) equities fell in Q1 as geopolitical tensions rose following Russia's invasion of Ukraine. Sanctions and higher commodity prices raised concerns over inflation, policy tightening, and growth.

Egypt, a major wheat importer, was the weakest market in the MSCI EM index, partly due to a 14% currency devaluation. China lagged as COVID-19 cases spiked and regulatory concerns affected US-listed Chinese stocks. Poland, Hungary, and South Korea also underperformed.

Conversely, Latin American markets, led by Brazil, posted strong gains. Other EM commodity exporters, including Kuwait, Qatar, UAE, Saudi Arabia, and South Africa, also saw significant gains. Russia was removed from the MSCI Emerging Markets Index on 9 March at an effectively zero price.

Global Bonds

Financial markets were volatile in Q1 due to the war in Ukraine and rising inflation. Government bond yields rose sharply as central banks adopted hawkish stances, leading to significant market moves.

The Fed raised rates by 25 basis points in March, with expectations of more hikes in 2022. The US 10-year Treasury yield increased from 1.51% to 2.35%, and the 2-year yield rose from 0.73% to 2.33%.

The UK 10-year yield rose from 0.97% to 1.61%, and the 2-year yield from 0.68% to 1.36%, as the Bank of England raised rates despite cost of living concerns.

The ECB pivoted to a more hawkish stance, with rate rises possible in 2022. The German 10-year yield increased from -0.18% to 0.55%, and the 2-year yield from -0.64% to -0.07%. Italian yields rose significantly, with the 10-year yield up from 1.18% to 2.04%.

Corporate bonds saw negative returns and wider spreads, underperforming government bonds. High yield spreads widened more than investment grade, though high yield had less negative total returns due to income.

Emerging market (EM) bonds posted negative returns, with local currency bonds being more resilient. Latin American currencies performed well, but Asia and central and eastern Europe currencies fell.

Convertible bonds, as measured by the Refinitiv Global Focus Index, fell 6.4% in US dollar terms. New issuance remained subdued due to market volatility and low stock prices.

Commodities

The S&P GSCI Index achieved a strong return in Q1 2022, driven by higher energy and wheat prices following Russia's invasion of Ukraine. Energy was the best-performing component, with strong gains in gas oil, natural gas, and heating oil prices.

In agriculture, wheat, Kansas wheat, and corn recorded sharp price gains due to supply concerns. In industrial metals, nickel, aluminum, and zinc prices rose significantly. Gold and silver also achieved gains in the quarter.