March started with Russia’s invasion of Ukraine dominating the headlines having occurred just a few days earlier. Commodity prices were firm on the back of supply concerns with oil surging well beyond $100 per barrel before expectations of a release from the US oil strategic reserve helped it back towards the $100 mark at month end. There were significant moves in other commodities where Russia and Ukraine’s combined output being disrupted caused prices to continue their upward trajectory. The Nickel market on the London Metals Exchange closed in early March and wheat surged again to be up 50% over a two-week period from the invasion, before subsiding to be barely changed on the month. Indeed, financial markets’ volatility dropped after the first week of the month.
There’s a war going on but… volatility has dropped off a cliff…
Despite Russia’s President putting his nuclear arsenal on standby.
Another headwind for financial markets has been higher inflation in western developed economies, exacerbated by the Russia/Ukraine conflict – having to pay more for things in short supply, notably energy. UK and US central banks both chose to increase official rates in March by 0.25%. The rhetoric around tighter monetary policy in the future and the next increases in official rates expected to be 0.50% in May, with more increases beyond, brought about a sell-off in debt instruments.
The implied Fed Funds rate out to January 2023 gives a good snapshot of what is:
- Is priced in to markets already
In the final week of March, the US Treasury yield curve inverted causing further mention of the recession word.
US consumer sentiment has plummeted despite higher wages and a tight labour market. The rises in energy and food prices are making a sizable dent in consumers’ disposable incomes.
US Fixed Rate Mortgages tend to be 30 years in length and their cost has climbed. Rates above 4.5% have normally signalled a slowdown in mortgages; they are approaching 5%. Volatility didn’t drop off in bond markets given the uncertain backdrop from inflation, tight labour markets and a tighter monetary policy. The following graph from FT.com illustrates the yield changes that occurred during March for ten-year gilts.
Of course, bond yields had previously been manipulated lower by quantitative easing (QE) but that is coming to an end, to be replaced by quantitative tightening (QT) so bonds in general did not provide the ballast to multi-asset portfolios they once did. In a turbulent first quarter of 2022, rising yields in government, investment grade and high yield bond markets caused negative returns beyond most developed equity markets in Q1 2022.
But Tina’s back
Perhaps the surprise of the month of March was the broad recovery in equity markets from the middle of month. So strong was this bounce that most posted impressively positive numbers for the month as a whole. Seemingly the sell-off in bonds served to remind investors that there is no alternative (TINA) to equities. That may be true for the quality growth businesses we favour – those with strong balance sheets, low borrowings and labour intensity and decent margins, but it might be a leap of faith for those businesses without some form of a moat.
As we noted previously, profitable companies with strong balance sheets and free cashflows are seeing opportunity after the equity markets’ sell-off which marked the first ten weeks of 2022. Some teed-up acquisitions while others, having seen their share prices fall in the growth sell-off contagion, used their cash reserves to announce share buy-back programmes. The amount of share buybacks in the US looks impressive in 2022 as can be seen below.
Easier monetary policy in China and a focus shift towards driving the domestic economy rather than competing in a price-sensitive global market hadn’t done much to aid a beleaguered stock market now reeling from further Covid outbreaks. However, official support for Chinese stocks was sufficient to give a significant lift to equity prices mid-month
Once again, currencies were the least volatile asset class in February. The US dollar firmed after Russia’s invasion. In contrast, the Japanese yen has been weak and unloved.
Unsurprisingly, commodities had a strong month, although oil gave back most of its gains as the month unfolded. Industrial metals and foodstuffs were the better performers.
If you have any questions, please do not hesitate to contact any of the TBAM team.