By Jan Faure
Global markets mixed on war tensions and renewed lockdowns in China
March was characterised by extreme volatility in equity and commodity markets. The war in Ukraine has not only shaken markets but aggravated inflation just as economies were seeing the light following two years of pandemic upheaval.
In the US, the S&P 500 index recovered from early losses to post a 3.6% gain for the month. Across the Atlantic, the UK’s FTSE100 index managed a 0.8% gain for the month while Europe’s Euro Stoxx 50 indexdeclined by 0.6%.
Indices in Hong Kong and China declined as technology stocks continued to struggle and as Chinese authorities introduced fresh Covid lockdowns. In Hong Kong, the Hang Seng index fell 3.2% in March while all major Chinese indices saw declines of between 6% and 10%. Lockdowns in Shanghai are impacting operations at the world’s largest container port and intensifying supply chain disruptions. China’s Covid Zero strategy poses an economic risk to both the Chinese and global economy. In response, Chinese policy makers have added support for the economy and acknowledged the need for further fiscal and monetary measures.
As expected, the US Federal Reserve lifted rates by a quarter percentage point and signalled hikes at all six remaining meetings in2022. The key question remains whether the Fed can tackle the highest inflation in four decades without pushing the economy into recession. Tighten too slowly and it risks allowing inflation to run out of control. Tighten too quickly and the Fed could unsettle markets enough to tip the economy into recession. The US yield curve indicated the latter.
The US yield curve (a chart of interest rates on bonds with different maturities) inverted for the first time since March 2020. An inversion of the yield curve occurs when shorter-dated yields rise above longer-dated yields and is regarded by some as an indicator of a recession to come. Fed chairman Jerome Powell played down the risk of a recession and said the US economy is “very strong” and can handle monetary tightening.
The US labour market is showing resilience with the unemployment rate running at 3.6%, in line with pre-Covid levels, while economic growth is strong. A buoyant US economy and labour market does give the Fed the confidence it needs to raise interest rates to achieve at least policy neutrality (where monetary policy is neither accommodative nor restrictive).
US unemployment rate 3 years (recession is shaded grey)
Inflation in Europe is also running at record levels, with Eurozone inflation hitting 7.5% in March, another all-time high and increasing pressure on the European Central Bank to act. Leaving inflation unchecked would risk economic growth if rising prices curb consumption. Of equal concern is war on the Eurozone’s doorstep which has the potential to severely dent confidence and investment in the region. If Russia halts gas exports to Germany, it will almost certainly lead to a recession in that country. It seems the ECB is stuck between a rock and a hard place: inflation requires a hawkish policy response yet the war in Ukraine (if it drags on) may necessitate the opposite.
Oil markets were a roller coaster of volatility in March. Brent crude gyrated between $96 and $139 a barrel. Oil prices initially surged after the US government voted to ban Russian energy imports. Prices then plummeted as China introduced strict lockdowns to combat a fresh wave of Covid infections. As the month drew to a close, the Biden administration announced a plan to release 180 million barrels of oil from the US Strategic Petroleum Reserve to fight the spike in fuel prices. The plan sees 1 million barrels of oil being released every day for up to six months and represents a third of the strategic reserve’s volumes. Brent crude ended the month at $105.25 a barrel, a decline of 2.5%.
With the backdrop of a war in Europe and the prospect of tighter monetary and fiscal policies, return expectations from all major asset classes look decidedly muted. US equities appear better insulated against the Russian conflict (versus European equities), but have long duration return characteristics which put them at risk of short-term price volatility. Asian equities, specifically those listed in China and Hong Kong, continue to struggle under a regulatory cloud, while Covid restrictions in China have put the Asia-Pacific region on the back foot. Decade-high inflation has further diminished the attractiveness of developed-market fixed income investments with real returns firmly in negative territory.
In times of market turmoil, protection from excessive investment losses will depend on a few basic investment principles. These principles are the same when it comes achieving long-term investment success: asset allocation must match an investor’s risk profile; investments must be well diversified; investment fees must not be excessive; and investors must take along-term view. Because these principles work, they allow investors to more easily (and calmly) take advantage of investment opportunities in times of market turmoil.
GLOBALINDICATORS: Local reporting currencies