February market update

Investment Update - Shaken but not stirred

Persistently high inflation is putting pressure on central banks to raise interest rates, which unsettled markets during the first few
weeks of the year.

At the start of 2020, the World Bank issued a warning that the global economy faces a variety of challenges, including new Covid variants, high inflation and an uncertain geopolitical landscape. Its economists lowered their growth forecasts and suggested that some richer countries might not reach pre-pandemic levels of output until 2023, with poorer ones taking longer.

Central bank monetary policies are another uncertain factor. After the US Federal Reserve (Fed) said it could raise interest rates multiple times this year and sooner than expected – to curb inflation – stock markets dropped in early January. The Fed is worried that inflation could spiral out of control, and a strong labour market has added to these pressures.

Stocks in the technology sector were among the hardest hit. The Nasdaq Index had its worst start to a new year since 2008 and European technology shares fell too. By the middle of January conditions had stabilised, with investors reassured by the Fed’s announcement that it would tackle the surge in inflation. However, tech share prices suffered again towards the end of the
month.

Inflation soars

The annual rate of inflation in the US jumped to 7%, which is its highest level since June 1982. Several factors are sustaining rising prices, with energy costs the largest contributor. In the UK, figures released in January showed inflation at a 30-year high, increasing pressure on the Bank of England to raise rates. The euro area’s annual inflation rate crept up to 5%, another record high for the currency bloc. Energy prices were again the main factor.

Yet the underlying investment environment remains buoyant with the global economy continuing to expand, and while the rate of growth has slowed, it is still doing so at a decent pace, and companies are delivering good profits growth. Notably, the UK’s economy has already recovered to its pre-pandemic level following a strong period of growth in the last few months of 2021, due in part to early Christmas shopping and an increase in dining out in November. This was, of course, before the Omicron variant of Covid became prominent in the UK.

China’s economy has been suffering from a variety of pressures, including a heavily indebted property sector, and it slowed at the end of 2021, which prompted a cut to one of its key interest rates. However, full-year growth was 8.1%, exceeding the government’s target of 6% and rebounding from the 2.2% growth registered in 2020. With much of the world dependent on Chinese exports, the country posted a record trade surplus of $676 billion in 2021 – the highest since 1950.