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February 2022 Review

Summary

Financial markets in February were buffeted by inflationary concerns, likely monetary policy responses and the simmering tensions from Russia’s aggression towards Ukraine. The latter exploded in the final week of February to widespread international condemnation of the aggressor.

Financial market volatility remained elevated throughout February with risk assets on the back foot; bonds and equities oscillating yet broadly downwards in price terms. Perhaps surprisingly, the full-scale Russian invasion of Ukraine on the 24th spurred a sharp rally in equity and, to a lesser extent, debt markets. Commodity markets from oil to metals and agriculture, the broad winners over the month, gave back a little of their previous gains too before ending the month on a firm, well-bid note.

War

We have little further to add to the daily news flow on Russia’s invasion of Ukraine so the following points list the key issues:

  • This is likely to be a protracted engagement
  • Global growth will be slower as a consequence
  • Inflation will be high for longer
  • The trend to greater onshoring will accelerate
  • Ukraine is a major economic capture due to its mineral deposits and agricultural output for Russia, masked by Putin’s political reasoning
  • This is another headache for US, UK and European central banks grappling with inflation and the magnitude and timeframe of their monetary policy response
  • Ukrainian defiance has been impressive and could be changing the narrative on Putin’s next move
  • BP’s divestment of its Rosneft stake and Germany’s military spending plans show the fast-moving but determined plans of the UK and European countries to show their commitment in opposing Putin

Inflation

Higher energy and food costs will raise inflation but cut disposable incomes. Whether tight labour markets enable workers to claw back their cost-of-living hit will be keenly watched by investors and central bankers alike.

The above factors highlight the importance of investing in companies who have pricing power to maintain margins and profitability, without the use of excessive leverage, in long-term demand themes.

Companies

The company results season has highlighted the profitable companies from the loss-making, with share prices quickly moving to reflect each outcome. Whether anyone should judge a business on a quarter, or even an annual result, is open to question. Of course, some banks and mining companies delivered and rewarded investors with dividends to match. They do not fit the bill nor are they long term themes we wish to commit our clients’ wealth to.

What did catch our eye was the number of profitable quality growth companies who, having seen their share prices fall in the growth sell-off contagion, used their cash reserves to announce share buy-back programmes.

The Rest

Perhaps slipping under the radar, was an easing of monetary policy in China and a focus shift towards driving the domestic economy rather than competing in a price-sensitive global market. Embedded in that shift, is the ideal of ‘Common Prosperity’.

Once again, currencies were the least volatile asset class in February. The US dollar firmed after Russia’s invasion as did the Swiss franc and Japanese yen.

Surprisingly, a good measure of long-term inflation expectations, the US 5 Year-5 Year forward moved higher but has remained below 2.5% as it has for some time.

While US, UK and European inflation data announced in February was elevated, some leading indicators of economic activity showed clear signs of softening.

Portfolio Activity

Russia’s invasion of Ukraine on 24 February led us to reduce further the already cut back exposure to any speculative growth (loss-makers) in both funds. This move reflects the bullet points listed above. The proceeds were invested in a broad commodity ETF that gives exposure to commodities expected to remain in short supply.

 

 

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