April 2022

April Investment Summary

A very toxic combination of macro factors produced a big reaction in risk markets during the month as all major equity markets fell sharply, reversing March’s gains and some. High and rising inflation, high and rising energy prices, the war in Ukraine, ongoing supply chain issues, hawkish central bank actions and the extensive Covid-19 lockdowns across much of China proved too much for risk assets. In the US, the tech heavy NASDAQ led the way falling 13% on the month, while the S&P 500 dropped 8.8%. The FTSE 100 outperformed finishing slightly positive over the month. This can be attributed to the index’s exposure to oil majors as well as the underperformance of the UK pound which fell some 4.5% against the US Dollar. That said, the weak pound – now down 7.3% YTD against the US Dollar – is not going to help the high inflationary environment in the UK.

Turning to inflation, this continues to rise to levels not seen in decades. In April, it registered 8.5% in the US, 7% in the UK and 7.5% in the Eurozone. Overnight interest rates, even after recent hikes by the US Federal Reserve (Fed) and the Bank of England (BoE), sit at 0.80%, 1.00% and -0.50% (European Central Bank – ECB) respectively. Yes, even with inflation over 7% in Europe, overnight interest rates remain negative! These rate levels are not going to reduce inflation and financial markets have only now begun to realise that there are likely many more interest hikes to come. Over the course of the month the Fed hiked rates by 50 basis points and intimated several more 50 basis point hikes are on the horizon. The BoE recently hiked by 25 basis points and also intimated there were more rate hikes to come. Even the ECB has hinted that a return to positive interest rates is coming later this year.
It’s clear that central bank balance sheets will shrink over the coming months. The Federal Reserve plans to stop reinvesting proceeds of maturing treasury bond holdings in June. Some $47.5 billion in bond proceeds will go uninvested every month starting then, with the amount increasing to $95 billion per month from September. This is a huge change from the net monthly purchases of $120 billion that had been taking place since March 2020. The BoE also expects to start selling some of its security holdings in third quarter, whilst the ECB plans to stop buying bonds around the same time.

It’s hard to overstate how big a change in the investment environment this is. We have spent much of the past decade with central banks buying trillions of dollars in securities (mostly bonds but the Swiss Central Bank has been buying equities as well) while they also reduced interest rates down to zero or below. This policy combination was incredibly supportive of both bond and stock prices. During the roughly two years of the pandemic central banks accelerated their pace of asset purchases. The Fed
alone bought over $4 trillion in bonds in just two years. During this stretch US equity prices, particularly the prices of technology related growth companies, soared. The NASDAQ index is still up 70% from the March 2020 lows, despite the 21% pullback YTD.

Rising interest rates and the absence of central bank bond buying is forcing a sharp adjustment in the valuation of risk assets. For example, we may be heading toward pre-Covid pandemic levels of equity prices. That is a long way from where some equities are currently trading despite the falls we have seen year to date.

What is driving the Federal Reserve’s hawkishness? Every economic indicator they look at in the United States is flashing red. Inflation is over 8%, the labour market is exceptionally tight, with wage growth running at 6% and 11.5 million jobs remain unfilled. House prices are climbing at an annual rate of over 20% and after two interest rate hikes the Fed funds still sits under 1%.

The UK and in particular the FTSE 100 has been an oasis in this desert of negative returns. The FTSE 100 is still up just over 2% for the year. This has been one of our larger holdings this year and we expect it to continue to outperform other developed markets. The index is heavily weighted to energy and commodities (all dollar earners so the weak pound helps earnings) and it lacks large exposure to the more speculative tech/growth types of firms. That said, domestic UK is likely in for a tough H2 with slowing growth and increasing energy costs, coupled with the weak pound, likely to weigh on more domestic focused companies’ earnings.

Will falling markets make the central banks stop? Yes, if the fall in asset prices were to significantly slow economic activity (and inflation). But given the rise in asset prices we have seen over the past two years; I suspect we are a long way from levels that would unnerve central banks. Could inflation begin to moderate and even fall and encourage the central banks to slow or perhaps halt interest rate hikes?
Perhaps, but inflation will have to fall significantly. This would probably require an end to the war in Ukraine and a sense that tightness in world energy and commodity supplies is likely to be reduced. I think it would be hard to assign a high probability to that outcome. Given this, our base case is for more market turbulence over the summer months.

We expect UK equities (FTSE 100) to continue to outperform other developed markets given the exposure to energy and commodities. Growth / tech names will likely continue to underperform in this rising yield environment - our preference within this sector is to favour companies which have strong pricing power, solid balance sheets and above average earnings growth. In fixed income, we maintain our preference for lower duration, where possible, as central banks still have a great deal of work to do and yields are just not yet attractive enough.

Jeffrey Brummette

Chief Investment Strategist

Disclaimer

This document was produced by Oakbridge for information purposes only and for the sole use of the recipient. Any information provided by a client ("Client Information") and used to produce this document will have been checked by Oakbridge for plausibility only and the client notified accordingly of any obvious anomalies. However, Oakbridge has not checked the Client Information in detail for completeness and accuracy and accepts no responsibility whatsoever in respect of the Client Information. The Client makes all investment decisions independently. Past performance, simulations and forecasts are not necessarily a reliable indication of future performance and the value of investments may fall as well as rise. The information contained in this document is only valid at the time this document is produced. A change in the economic environment, possible changes in the law and other events may cause future performance to deviate from that expressed or implied in this document. The information and analyses contained in this document have been gathered from sources that are generally considered to be reliable. However, Oakbridge makes no representation as to their accuracy or completeness in relation to the investment products described and does not accept liability for any direct or consequential losses arising from reliance on the information contained in this document. An Oakbridge Group company may, to the extent permitted by law, participate or invest in other financing transactions with the issuer of the investment products referred to herein, perform services or solicit business from such issuers, and/or have a position or effect transactions in the securities or derivatives thereof. Alternative investments, derivatives or structured products are complex instruments that typically involve a high degree of risk, and are intended for sale only to investors who are capable of understanding and assuming the risks involved. Investments in emerging markets are speculative and significantly more volatile than investments in traditional markets. Some of the main risks are of a political, economic, currency or market-related nature. Furthermore, investments in foreign currencies are subject to exchange rate fluctuations. Investments in the investment products described in this document should be made only after carefully studying and reviewing the product documentation. The opportunities and risks associated with each investment product can be found in the relevant underlying securities prospectus and any other supplementary documents. All documents will be made available at any time upon request. Oakbridge does not provide tax or legal advice and, before entering into any transaction, investors should independently consider the financial risks as well as the legal, tax, credit and accounting consequences of that transaction. The attached material is not the result of our/a financial analysis. Neither this document nor any copy may be further distributed to any party. In particular, it may not be sent, taken into or distributed in the United States or given to any US person. This restriction applies equally to other jurisdictions, unless such actions are performed in compliance with the applicable laws of such jurisdiction. This communication is confidential and intended solely for the person to whom it is delivered. No part of this communication may be reproduced in any form or by any means or re-distributed without the prior written consent of Oakbridge. This communication should not be construed as an offer to sell any investment or service. This communication does not constitute the solicitation of an offer to purchase or subscribe for any investment or service in any jurisdiction where, or from any person in respect of whom, such a solicitat ion of an offer is unlawful. If you are in doubt about the securities to which this communication relates, you should consult an independent financial adviser. The information in this communication has been prepared in good faith, however, no representation or warranty, expressed or implied, is or will be made and no responsibility or liability is or will be accepted by Oakbridge or its officers, employees or agents in relation to the accuracy, completeness or fitness for any purpose of this communication. The information stated, opinions expressed and estimates given are subject to change without prior notice.

The services described are provided by Oakbridge or by its subsidiaries and/or affiliates in accordance with appropriate local legislation and regulation. Certain products and services may not be available in all locations or to all Oakbridge clients.

Oakbridge is regulated in Jersey by the Jersey Financial Services Commission for the conduct of Investment Business.

Oakbridge is a limited company with company number 121454, incorporated in Jersey on 7 June 2016. Its business address is Weighbridge House, 2nd Floor, Liberation Square, St. Helier, Jersey, JE2 3NA.

Oakbridge is a registered business name of Oakbridge Limited.

Oakbridge forms part of the ED Group.