Market Analysis Mar 2022

Throughout the quarter, the spotlight was firmly on mounting concerns regarding inflation, a narrative that had been gaining momentum since the latter part of 2021. The global economy grappled with supply shortages spanning various sectors, a consequence of the post-pandemic recovery process. These shortages, notably affecting commodities like semiconductors and automobiles, exerted upward pressure on inflation. The situation took an intensified turn as Russia's invasion of Ukraine amplified existing supply concerns, propelling oil and gas prices upward due to European and G7 sanctions on Russia. The agricultural sector experienced its own set of disruptions, particularly evident in the production of wheat and sunflower oil in Ukraine.

Curiously, despite its historical underperformance, the UK market, especially its large-cap segment, emerged as the standout equity market of the quarter. This performance owed much to the market's substantial exposure to the energy sector and basic materials. Investors strategically pivoted away from growth-driven sectors and markets, favoring opportunities in undervalued assets. This shift was fueled by mounting apprehensions about the impact of surging interest rates on overpriced assets. Contrarily, continental European equities encountered challenges due to their reliance on Russian energy resources, the blowback from sanctions on the European economy, and the geographic proximity to the conflict.

The momentum behind the rotation towards value-focused sectors and stocks persisted, leading to further shifts in market dynamics. Sectors that had previously lagged experienced notable relative performance in comparison to growth-oriented counterparts. Notably, the energy sector reaped benefits from the Russian invasion and its resulting sanctions. The concern surrounding the security of energy supply to continental Europe fueled significant rallies in oil and natural gas prices, with corresponding negative implications for sectors such as retail, travel, and automotive. Meanwhile, high-valuation growth companies and sectors grappled with selling pressure, as investors braced for the repercussions of central bank rate hikes aimed at curbing inflation.

In the bond market, the unsettling surge of inflation above 7% prompted anxiety among investors, leading to a surge in demand for higher yields and consequent declines in bond prices. Fixed-income assets were already grappling with the pressure of persistently high inflation, a situation not witnessed in over a decade. The landscape further darkened as the ramifications of the Ukrainian conflict on commodity supply chains began to crystallize. US dollar-denominated emerging market debt, UK corporate bonds, and UK government gilts bore the brunt of the downturn in the fixed-income realm. In contrast, inflation-linked bonds displayed a relatively more resilient performance.

In the realm of commodities, the oil and gas sector experienced robust rallies during the quarter. The invasion and ensuing sanctions heightened existing concerns about energy supply scarcity. The imposition of unprecedented sanctions raised apprehensions of significant supply disruptions. This ripple effect extended to agricultural staples like wheat and sunflower oil. Ukraine, a significant producer, grappled with severe production setbacks, translating to surging prices that resonated through the broader agricultural landscape.

Property investments exhibited a commendable resilience throughout the quarter. Most direct property assets enjoyed upward revisions, demonstrating their ability to withstand the volatile climate. Conversely, real estate investment trusts (REITs) posted slight negative returns on a global scale, reflecting their short-term correlation with equities. Infrastructure assets, conversely, delivered positive returns due to their ties to rising energy prices. Meanwhile, gold shone as a star performer, delivering nearly double-digit returns as it stood steadfast as a store of value amid the turmoil stemming from the Eastern European conflict.

As the curtain fell on the first quarter of 2022, investors found themselves navigating a dynamic and intricate landscape defined by diverse factors including inflationary pressures, geopolitical tensions, and the ever-changing contours of supply and demand. Successfully navigating these complexities demanded a keen understanding of these interwoven dynamics, paired with a nimble investment approach equipped to respond adeptly to the ever-evolving currents of the global financial arena.