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DPM in Review : January 2022

Posted 2nd February 2022

Markets in review:

Equities Index Level YTD Change
FTSE 100 7,466 1.1%
MSCI – Europe 155 -3.9%
S&P 500 4,432 -7.0%
Shanghai Composite (China) 3,361 -7.6%
Nikkei (Japan) 26,717 -7.2%
Gold 1,787 -2.3%
Brent Oil Futures 90.03 15.7%

* Figures as at 28th January 2022

DPM in review:

  • UK GDP grew 0.9% in November according to figures from the Office for National Statistics. This meant that UK GDP was 0.7% above its February 2020 level, before the first wave of the COVID-19 pandemic, marking a significant milestone in the economy’s recovery. UK inflation surged to a 30 year high of 5.4% in December as the cost-of-living crises deepened.
  • UK house prices rose by 10% in November from a year earlier, up 0.2% from October.
  • US GDP grew at 5.7% for the full year in 2021, as the world’s biggest economy bounced back from the pandemic. The US Federal Reserve left interest rates on hold in January despite inflation hitting 5.8% in December, its highest year on year level since 1982. Energy prices in the US rose 29.9% whilst food prices increased by 5.7%. The FED is expected to begin a series of rate rises in its March meeting.
  • In Germany the rate of inflation also hit its highest level in almost 30 years as the measure jumped to 5.3% in December. German GDP meanwhile fell by 0.7% in the fourth quarter as the country’s economic recovery ground to a halt following the reintroduction of restrictions.
  • French GDP grew by 7% in 2021, recording its strongest annual rate of expansion since 1969. In an act of state intervention, the French Government will force EDF to take a £7bn hit in order to protect households from higher energy prices by limiting energy bill increases to 4%.
  • China’s economy expanded by 8.1% in 2021, the fastest growth in a decade following the slump in activity at the start of the 2020. China’s property sector continued to struggle in December as the big property developers attempted to refinance and manage down their debt levels. Property investment shrank by 17% in December from November. Such spending contributed 13% of Chinas GDP in 2021.

DPM in action:

Global stock markets had a tumultuous time during January as they began the process of trying to adjust for a higher interest rate environment, tighter monetary policy as well as dealing with the geo-political uncertainty that the tensions between Ukraine and Russia are providing. In addition to these problems, the highest rates of inflation in 30 years are being recorded throughout developed economies which are now starting to hit consumer’s disposable incomes. The S&P 500, the broadest gauge of America stocks finished 5.66% lower in January, the drop would have been 7% if it were not for a final day rally. The tech heavy Nasdaq fell by 9.12% on the month as a style rotation out of tech stocks into value orientated stocks took a heavy toll. Europe got off to a poor start as well with the main German and French indexes falling 3.6% and 2.6% respectively. The FTSE 100 in the UK was a rare bright spot managing to squeeze out a gain on the month of 1.1%, due to the deep value nature of the stocks listed on the exchange. Chinse stock markets continued to underperform as the big property developers continued to struggle under the weight of their excessive debts. The Shanghai composite index finished the month 7.6% down.

Rising interest rates are now an inevitability as policy makers look for ways to curb surging inflation. The US Federal Reserve is expected to begin its rate raising cycle in March with a predicted 4 or 5 hikes in 2022 to reach a target rate of 1.25% from the current 0.25% rate. The Bank of England (BOE) has already started raising its central rate and is expected to do so again in February. We can expect to see at least 3 rate hikes from the BOE this year. Rising energy prices continue to drive the inflation rates upwards, the price of Brent Crude recently hit $90 and gas prices although down from their 2021 peak remain elevated. We would expect to see a spike in both the oil and gas prices should the tensions between Ukraine and Russia turn hostile.

Despite the background noise, the investment committee remain confident that equity markets can produce positive returns in 2022 albeit at a more subdued level than the returns experienced in an extraordinary 2021. With the pandemic now looking more like an endemic, life will return to normal and consumers will be more confident to unleash the additional savings they have accumulated during lockdowns. This in turn should lead to positive corporate profits, and conversely healthy share price growth.

During January, the investment committee took advantage of the pull back in equity markets to redeploy the cash held within client’s portfolios. A global equity income fund was purchased in order to take advantage of the rotation from ‘growth’ shares into a more ‘value’ orientated approach. More investors are seeking income paying stocks that produce cashflows now rather than growth stocks that promise revenues but at an unknown point in the future. The shares the fund managers invest in should produce stable returns in an inflationary environment by virtue of being able to command pricing power. The committee also made the decision to invest a small amount of funds into an Indian equity fund to take advantage of the secular growth opportunity India as a country can provide. The committee is particularly attracted to the advancements seen in the Indian Telecommunications and thriving manufacturing sectors.

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