January Investment Summary
A small rally in the last few days of January turned a disastrous start to the year for major equity markets into merely a terrible start. Only the FTSE 100 offered positive returns as markets reeled from concerns over rising inflation, and the newly found desire by central banks to tame it. In addition, the rising tension surrounding Ukraine and the potential for a Russian invasion added to investor fears. Energy prices rose further as the strong global economy was clashing with energy supplies that are unable to match rising demand. Years of reduced capex spending in the energy sector has left the world (for the moment at least) facing steadily rising prices for energy and many other commodities.
Inflation has now reached levels that central banks can no longer ignore. They are being pressured by governments and the general populace to “do something”. The Federal Reserve at their latest meeting strongly hinted they would raise rates in March. They also signaled their readiness to shrink the balance sheet. The Bank of England at its latest meeting hiked rates again and stated they too would begin to shrink their balance sheet. Even the ECB suggested that they would be prepared to act if inflation stayed high. The financial markets were caught off guard and began to rapidly reprice their expectations for rate hikes with bond markets seeing a sharp rise in yields at the same time as equity prices fell. A very unpleasant combination for investors but one we may have to get used to for this year.
Central banks continue to forecast that inflation will fall in the second half of this year back towards their 2% target as supply chains normalise, goods demand begins to moderate (in favour of a return to greater consumption of services) and year-over-year base effects fall out of the calculations. But central banks are no better forecasters than the rest of us. It is not clear that inflation will fall as fast as they desire (hope). In January, the expectation was that the US labour market would see a decline in hiring due to the Omicron variant of Covid-19, instead we saw strong hiring and upward revisions to the previous two months. To top it off, wage gains showed their strongest rise yet with average hourly earnings growing at a 5.7% annual pace.
It is clear that central banks are in a difficult spot (much of their own making). They can no longer continue the exceptionally accommodative polices they have been running since the onset of the Covid-19 pandemic. How high do rates need to go for inflation to start to decline? How large will the reductions in their balance sheets need to be to aid in reducing inflation? There is no clear answer to these questions. Don’t get caught up in the “will the Federal Reserve hike 0.25% or 0.50% debate in March?” That may matter for a day or two in markets, but the bigger picture is how far will they have to go? They will tighten until they achieve some results. Tightening policy will result in slower growth, but it is not a simple or clear equation. One cannot say that hiking by 1.0%, for example, will reduce growth by 0.5%. We expect central banks will go slowly, but they will be persistent until they see inflation trending lower. This is a big change to the investment environment. We are losing the very powerful tailwind of super abundant liquidity that we have been enjoying for the past decade. Markets are already reacting to this, and central banks collectively have done very little. What happens if the liquidity tailwind turns to a headwind?
Be mindful of stocks with rich valuations and no earnings. Volatility is rising and liquidity is poor. Who would have thought that Meta (Facebook) could fall 25% in a single day? They were a $1 trillion dollar market cap stock that is very widely held and very profitable. The markets will notice the exit from super easy money.
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.