Affinity Market Commentary – January 2022
Fed turns hawkish as elevated inflation persists Government bonds underperform corporate bonds as faster rate rises loom
Fed prepares markets for tapering and rate rises
Fed manages to avoid another ‘taper tantrum’ and announces the end to net asset purchases as early as March, along with three rate rises planned for 2022. US corporate earnings rose to fresh highs of $2.5trn, while the unemployment rate fell to 3.9%, the lowest since February 2020. Inflation is a concern, as the annual inflation rate reached 6.8%, while the core rose to 4.9%. GDP growth in the third quarter was 2.3% on an annualised basis, much lower than the previous quarter’s 6.7% expansion, mainly due to Covid restrictions delaying businesses reopening.
Up 4.4.% (US 500)
European markets outperform
European markets outperformed UK and US markets, as risk appetite returned following robust corporate earnings and the perception that the new COVID-19 variant is less severe than initially anticipated. Healthcare, banks, tech and travel stocks were among the best performing sectors. Inflation is still seen as temporary in the Euro area, where eurozone’s annual inflation hit 5.0% in December. Core inflation, which excludes volatile prices such as energy, food, alcohol & tobacco is closer to the ECB’s 2.0% target at 2.6%. The ECB has so far ruled out a rate rise in 2022.
Up 5.4% (Euro 600 Index)
The Bank of England raises Rates
The Bank of England raised rates by 15bps to 0.25%. CPI inflation was 5.1%, much higher than the Bank’s target of 2.0%, prompting a letter to the Chancellor. The letter outlined the ‘uneven effects’ of COVID-19, which included supply bottlenecks, as well as a global rise in energy, commodity and household goods prices. While the rate rise benefited banks and financial stocks, travel & leisure stocks and retailers bore the brunt of the supply chain disruptions. The more defensive areas of the domestic market, such as supermarkets, including M&S, staged a turnaround on the back of increased spending for the festive period.
Up 4.5% (UK All Share)
Omicron fears impact China
Fears that the faster spreading Omicron variant of COVID-19 would derail growth hit China the worst, due to its ‘zero-Covid’ policy. Hong Kong and Singapore markets were also weak, as investors anticipated more restrictions may be put in place. Tech stocks lifted Taiwan and Indonesian markets. Japan performed exceptionally well, a representation of the post pandemic reopening of markets – shipping and commodities-related stocks enjoyed rallies from a sector switch, while stocks which were in high demand during the pandemic, such as healthcare and videogaming, sold off.
Down 3.5% (Asia Index)
- Equity markets saw increased volatility at the start of the month due to Omicron concerns and Fed policy news, but eventually stabilised at year-end, where the S&P hit all-time highs.
- Markets are displaying increased signs of a sector rotation, away from growth – e.g. technology stocks selling off – and a rising demand for value stocks.
- Emerging markets underperformed developed markets, and in particular the US, with the strength of the US dollar, combined with rising borrowing costs, being a headwind.
- Oil prices surged in December as Omicron concerns eased and vaccinations rose, the demand for crude oil outstripped supply and lead to a surge in oil prices.
- Sterling proved resilient, as the rate rise by the Bank of England, as well as the subsequently planned four rate rises, offers sufficient investor support of a stronger economy.
- Currency markets have been shaken up with the rise in consumer prices across the globe
- The Bank of England’s decision to keep rates unchanged weakened the currency, but benefited the stock market and US dollar earning companies
- The possibility of faster bond tapering was a further boost to the US Dollar
DISCLAIMER – The value of investments and the income from them can go down as well as up and past performance is not a guide to future performance. Returns are in local currency unless indicated otherwise. Source: Bloomberg
- Government bonds were weak and yields rose, as persistent inflation caused the Fed to turn hawkish and the Bank of England to raise rates.
- UK Gilts and US Treasuries sold off, with yields on the 10-year bonds rising to 0.97% and 1.51% respectively.
- Eurozone bond yields, along with German 10-year bunds, are still at negative territory, as the ECB continues with their ultra-loose monetary policy.
- High-yield bonds continued to produce the best returns for investors, as the expectation that economic and corporate growth is likely to continue to boost investor confidence and, in turn, risk appetite.
- Spreads have not shown much sign of widening, despite increased default risk. However, there remains the risk that spreads may reverse from here.
Disclaimer: The information contained in this report is for illustrative purposes only and should not be construed as a solicitation nor offer, nor recommendation to acquire or dispose of any investment. Specifically, the share class used to create the illustrations may not be available on all platforms nor be suitable for individual investors. This report was produced by Collidr Research (“Collidr”) for Affinity Integrated Wealth Management (AIWM) and while AIWM and Collidr use reasonable efforts to obtain information from sources which they believe to be reliable, neither AIWM nor Collidr make any representation that the information or opinions contained in this report are accurate, reliable or complete. The information and opinions contained in this report are subject to change without notice. Model returns are calculated using the most appropriate share class of the underlying funds, having regard to the illustrative nature of the report, with all income being reinvested. As a result, real portfolio performance may vary from model performance. Where model portfolio histories are shorter than three years, historic model returns are substituted prior to inception date with returns from an Collidr performance benchmark. This benchmark is constructed from the average returns of all Collidr portfolios with similar risk profiles that existed during that time. The value of investments and the income from them can go down as well as up and past performance is not a guide to the future performance. Affinity Integrated Wealth Management is a trading style of Buryfield Grange Limited, Buryfield Grange Life Planning Limited and Affinity Integrated Wealth Management Ltd. ‘Buryfield Grange Limited’ is authorised and regulated by The Financial Conduct Authority. Not all services provided by Buryfield Grange are regulated by the Financial Conduct Authority. ‘Buryfield Grange Limited’ is registered in England and Wales at Inspire House, 20 Tonbridge Road, Maidstone, Kent, ME16 8RT. Company registration number 4568338. Collidr Research is a trading name of Collidr Technologies Limited, registered in England and Wales at 34 Southwark Bridge Road, London, SE1 9EU. Company registration number 09061794. Data Providers: Bloomberg L.P. and Collidr.
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