February Investment Summary
The dismal start to 2022 for capital markets continued in February. The Russian invasion of Ukraine, in a premeditated and unprovoked attack, has added a terrible human tragedy and a myriad of economic side effects to the investment world. Major equity markets were down 3% to 6% for the month in sterling terms. Only the Chinese CSI 300 index managed a small gain. Fixed income did not offer any help as the modest fall in yields late in the month could not overcome the rise in yields from the first three weeks of the month. We now have both equities and fixed income returns negative for the year. Not a good place to be as an investor.
Concerns over inflation have been overshadowed by the shocking events in Ukraine. As Russia now appears to be targeting civilians, killing innocent people destroying hospitals, schools and critical infrastructure like running water and electricity, it becomes ever more difficult to see how this conflict ends. We won’t begin to guess. We certainly know how we would like it to end with the removal of President Putin as the leader of Russia, but we can offer no guidance on when that might happen. So as the conflict drags on the economic side effects will continue.
The economic isolation of Russia by the West has essentially cut them off from any commerce with the outside world. Despite carve outs in the sanction’s regime imposed on Russia by the US, UK and the EU to allow energy exports from Russia to continue, energy prices have risen significantly. Shippers are unwilling or unable to pick up Russian cargoes bound for the West. Banks and insurers are unwilling or unable to finance and insure those cargoes. The result has seen oil jump to nearly $120 per barrel, at the time of writing, and many other commodity prices surge higher.
Both Russia and Ukraine are big producers of many gases used in semiconductors, electric vehicles and smartphones. By way of an example, Ukraine is responsible for over 50% of global neon gas supplies. Gas mixtures that include neon are used to power lasers for etching patterns into semiconductors and with inventory levels in the industry typically lasting only 3 – 4 weeks, we could see even more supply constraints for chips and the subsequent knock-on impact for other sectors such as autos and smartphone producers. The Russian invasion of Crimea in 2014, saw neon prices increase by over 600%. Already tight commodity markets are seeing supply further reduced. This of course is adding to inflation pressures that were already making central banks nervous and governments and consumers angry.
What will the central banks do? FOMC Chair Powell delivered his semi-annual monetary policy report to the US congress last week and indicated that he was expecting a 25-basis point hike in rates to be announced at their meeting later this month. He didn’t rule out hiking faster, if necessary, to bring down inflation. He was asked by one Republican Senator if he (Powell) could be as firm and determined as Federal Reserve Chair Paul Volker was in the late 70’s and early 80’s in fighting inflation – Volker took the radical step of switching Fed policy from targeting interest rates to targeting money supply - Powell responded “Yes”.
In March of 2020, the Fed cut rates essentially to zero and began buying $120 billion a month to offset the effects of the Covid-19 pandemic. Now, two years later, rates are still essentially zero, unemployment is back to pre-Covid levels and the Fed is only now halting their purchase of bonds. Oh, and inflation is 7.5%.
To a lesser degree, this same challenge faces the Bank of England and the European Central Bank (ECB). The ECB hinted in early February that they might have to become less accommodative with monetary policy as inflation keeps rising. The surge in energy prices is only going to make inflation worse and leave the ECB in a very unenviable position. At some point the rise in energy prices will slow activity as higher energy costs take away from discretionary spending. We just don’t know at what level of oil and gas prices that is. That said, history tells us that in the past 50 years every time oil prices (adjusted for inflation) have risen 50% above trend, a recession followed.
In our view, the outlook for capital markets will continue to be challenging. First and foremost, we need to see a peaceful end to the war in Ukraine. We need to see inflation ease and the process of central bank tightening not become too disruptive for activity. We believe that all of this will happen. However, Russia's invasion of Ukraine has shattered the relative peace we have enjoyed in Europe post the end of the Cold War. The ramifications from an investment perspective will ripple across the globe as sanctions start to bite. Indeed, authoritarian regimes may look to diversify away from the US Dollar in an attempt to circumvent any future sanctions. These are questions for another day. For now, our thoughts and prayers are with the people of Ukraine.
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.