Volatile conditions in financial markets remained a key theme moving into the second week of 2022 as investors continued their rotation from growth to value-oriented assets. Uncertainty around rising inflation, Omicron cases and political uncertainty all played a role in market movements this week. Despite expectations for easing later this year, inflationary pressures remain a key contributor to market uncertainty in the short term as central banks across the globe look to how monetary policy can cool rising prices.
It is our view that, despite improving clarity around the effects of Omicron and easing supply chain constraints, 2022 has the potential to be a volatile year for markets as investors digest dataflows from central banks and policy makers. Considering this, we will continue to mitigate excess volatility within the OBI strategy through active management and strong fund selection, using macroeconomic themes to position the portfolios accordingly as market conditions change over the year.
Market Moving Events
Inflation in the US reached 7% in the last month in 2021 compared to 6.8% in November, recording the highest inflation reading since 1982. Although the figure came in line with analyst expectations, markets are now attempting to price in how quickly the Fed will look to raise interest rates to keep inflation in check, with the general expectation being four rate hikes beginning in March, once the asset purchasing program has ended. During a nomination hearing earlier this week, Fed Chair Jerome Powell reassured investors that the Fed is determined to prevent high inflation becoming entrenched, and that the economy will be able to withstand any tightening in monetary policy. Powell’s comments eased investor concerns that the Fed isn’t likely to prioritise inflation reduction above everything else, including employment, which prior to the hearing was a main concern for investors. Unemployment data also showed an increase in labour market tightness, with the unemployment rate falling more than analysts’ expectations to 3.9%.
Political controversy weighed on UK markets this week, following the news that Boris Johnson broke lockdown rules in May 2020 which led to a formal apology in Parliament on Wednesday. With an adverse reaction from the public and members of his own party calling for his resignation, it is expected that questions over the future of Mr Johnson as Prime Minister will result in considerable volatility within UK markets over the coming weeks. Away from the political headlines, UK Equities were somewhat boosted this week by strong retail sales off the back of the Christmas period, while oil and mining companies experienced a rally following US inflation data. On the monetary policy front, UK investors are weighing up bets on how quickly the Bank of England could tighten monetary policy given rising inflation. The discrepancy in Central bank policies across regions remains, with the Bank of England expected to announce several rate hikes over the course of the year, whilst traders remain confident that the ECB will not raise rates in 2022.
Geopolitical tensions remained high this week as NATO secretary general Jens Stoltenberg ended talks between alliance members, with no signs of progress towards defusing the crisis between Russia and Ukraine. Meanwhile, investors are also weighing up the potential impact China’s strict zero Covid policies could have on the economic recovery and growth prospects.
Market Reaction
While uncertainty weighed somewhat on risk assets, a continuation of the rotation away from growth was a key theme this week and was evident in the under performance of the tech and growth-focused funds, with investors looking towards more value orientated risk assets given the expectation of rising interest rates. US Markets reacted positively to Fed Chair Powell’s commitment to mitigating inflation and investors had already priced in this week’s inflation data. UK Large Cap equities remained relatively flat over the week, whereas smaller caps were hit harder in the face of inflationary pressures.
The US 10-Year Treasury yield remained at the highest levels seen for 2 years, reflecting investor concern over inflation expectations. This was also reflected in the UK 10-Year bond yield which reached a two month-high of 1.2% before retracing slightly. While government bonds had been the weakest performer within the non-equity sector, corporate and high yield bonds also underperformed as investors rotated away from fixed income in the search of value equities.
Portfolio Positioning and Performance
Given uncertain and ever-changing market conditions, the redeployment of elevated cash levels at the end of 2021 has given the OBI portfolios a balance between growth and value-oriented risk assets which is aimed to contend with the threat of potentially higher volatility throughout the year. Geographically, we remain tilted towards UK equities, with the remaining equity allocation diversified amongst other regions and keeping sustainability as a key theme. Within our non-equity exposure, we have a diverse range of property, infrastructure, credit, and corporate debt.
The OBI portfolios fell over the week, alongside a general decline in equity markets and underperformance from fixed income sectors. A key drag on performance over the week was our growth-oriented European equity exposure. Despite Japanese large caps falling almost 2% over the week, our exposure to smaller-cap Japanese companies alongside our global value-orientated allocations helped reduce the overall drag on performance felt by other sectors.
As the economic growth outlook remains positive over the course of 2022, we remain optimistic yet cautious that factors such as slowing growth, inflationary pressures and changes to the global recovery could heighten volatility over the next twelve months. By utilising a diversified range of asset classes and geographical exposure within the OBI portfolios, we believe we are well positioned to navigate market movements as clarity improves in the months ahead.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment. OCM Wealth Management Limited is authorised and regulated by the Financial Conduct Authority (FCA Registration No: 418826) OCM Asset Management is a trading name of OCM Wealth Management Limited.
Key Events We Are Watching Over the Coming Weeks:
- Friday 14th – US Retail Sales, December
- Tuesday 18th – UK Unemployment Rate, November
- Wednesday 19th – UK Inflation Rate, December
This Day in History
On this day in 1942, American industrialist Henry Ford was granted a patent for his plastic automobile construction.
Thank you for reading, have a great week!
Jason, Gina & Pete
