2022 Gets Off To A Bumpy Start

Market Update 07 January 2022

Welcome back to the first of this year’s market updates from Antracite Investment Asset Management. This week there was no gentle easing back into the swing of things for markets which kicked the new year off with big falls in both equities and non-inflation-linked bonds. This followed the release of the minutes of the last US Federal Reserve rate setting meeting which showed the bank was a lot more worried about inflation than it had been letting on. This news, combined with more inflation data showing prices were rising faster and in more places than expected, spooked a market that had closed out 2021 already on edge.

While all the reports highlighted the change in tone, a read of the minutes shows they left themselves plenty of wriggle room to hold off raising rates if they can find a reason to. There is quite a lag between changes to monetary policy and feeling the effects, with inflation now being driven by events of a year ago. The Fed needs to try and convince people it has control of inflation while not being able to do anything about it, at least not immediately. Market reaction this week suggests they might be pulling it off.

Meanwhile, the Omicron variant of Covid-19 is busily spreading rapidly but, thankfully, is proving to be a far milder infection than previous strains and although there has been a rise in hospitalisations, many are “incidental” as people going into hospital for other reasons test positive. There’s no need to panic about the new milder strain itself, but self-isolation has meant that over 39,000 NHS workers have been off work this week and the army have been drafted in (again) to help.

Encouragingly, and thanks in large part to the UK’s rapid booster campaign, the UK’s case fatality rate (percentage of people with Covid-19 who die) has fallen to just 0.14%, i.e. 99.86% of people infected survive – as the graph above demonstrates. This compares favourably with the EU and USA where the CFR is just over 0.5%.

  USA: MARKETS SUFFER AS INFLATION AND INTEREST RATES RISE

The new year started with equities and non-inflation-protected government treasury bonds falling sharply, with high value technology stocks leading the way. Tech stocks have seen their biggest decline in almost a year as investors favour value stocks on hopes that Omicron is milder than previous variants and will lead to less economic disruption.

The sell-off accelerated following the release of the Federal Reserve’s Open Market Committee meeting minutes. They show the bank’s concern about inflation and this has generated speculation that the central bank may raise interest rates faster than expected and further withdraw market support. The two-year Treasury bond yield increased to 0.82% shortly after the release and the yield on the benchmark 10-year Treasury has risen by 0.2% to 1.72% this week. Tech stocks are sensitive to rising interest rates and the Nasdaq Composite is down more than 3% with some of the pandemic’s winners such as Alphabet, Microsoft and Nvidia all down 6% or more.

Our clients have been largely protected against market fall backs and profit taking with the significant de-risking that we put into action over the second half of 2021.  We are now currently finalising our asset allocation strategies across the risk spectrum for the first quarter 2022 following our Investment Committee Meeting this week – and we are posturing to take advantage of market pull backs and the better news about the Omicron variant seemingly not being the grave threat that it was initially thought to be – which has seen the UK government decide not to increase measures to the next phase.

The US jobs market is looking robust overall, as even though employers hired only 199,000 people in December which was weaker than anticipated, 6.4Million jobs were added during 2021 replacing most of the jobs that were lost at the height of the pandemic. But the jobless rate dropped sharply in December to 3.9% and wages rose, the Labor Department confirmed.  So, the mixed data follows a record year of jobs growth in the US. Interestingly, a record 4.5Million Americans quit their jobs in November, – which is a sure sign of confidence in the labour market, – and as things stand today there are 10Million jobs waiting to be filled as reported by the government this week. Jobless claims have dropped to a near 50-year low.

The US CPI inflation annual rate in November was 6.8% which provides some comfort for investors holding US Treasury Inflation Protected Securities, just as investors in UK Inflation Linked bonds have also benefitted by the rising inflation numbers.

  COMMODITIES: OIL AND GAS PRICES STILL A MAJOR CONCERN

Oil and gas prices have been rising sharply in the first days of 2022. Earlier this week the OPEC+ nations indicated they think demand will continue to pick up this year as they agreed to stick to their plans to increase supply – with a further 400,000 barrels a day due to come on line in February. However, concerns that political unrest in oil rich Kazakhstan will disrupt production has helped contribute to Brent Crude rising around 7% this week. Output from Libya has dropped recently due to unrest in the country and cold weather in Canada and the northern US has also restricted supply. Gas prices in the UK and Europe have been rising steeply once more.

Low reserves in Europe have combined with low levels of supply from Russia to drive prices up. A key pipeline from Russia to Europe runs through Ukraine and political tensions over Russian military action in the area have also contributed to the rise in prices. UK gas prices remain far below the peak they hit in early December, but they have risen around 35% this week.

  UK: COVID CASES HIT RECORD HIGHS BUT GOVERNMENT NOT WILLING TO INTRODUCE NEW RESTRICTIONS

The Omicron variant of Covid-19 continues to drive a surge in new infections. In the UK the seven-day average for new cases hit 171,000 around three times higher than the previous peak in January 2021, while in the US new daily infections hit 750,000. Despite the huge increase in infections, the UK and US have so far resisted introducing further restrictions to slow the spread as data emerges that suggests Omicron infections are less severe than other variants.

As mentioned in the introduction, the rise in cases is causing considerable disruption in the NHS due to staff absences and many other employers have issued warnings about staff shortages. However, hopes that this wave of infections will pass quickly without further restrictions have helped cyclical companies outperform highly valued growth stocks. Airlines have been a beneficiary of a more positive outlook. Although they have underperformed considerably since the outbreak of Covid they have been one of the stronger performing sectors in early trading in 2022.

  UK: HOUSE PRICES

UK house prices rose at a faster rate in 2021 than in any calendar year since 2004, according to Halifax Bank. Prices increased by 9.8% during 2021 – with the average house price in the UK hitting its record high of £255,000.00.

The Halifax commented that buyers sought more space during lock-down and they also took advantage of low-cost borrowing and stamp duty holidays. This 9.8% rise was the fastest annual rise since the 12.5% rise in 2004.  That said, the prospect that interest rates may rise further this year to tackle rising inflation and increasing pressures on household budgets suggest house price growth will slow considerably from the 2021 rate, although they are still expected to rise during 2022.

GLOBAL INVESTMENTS

As our clients will be aware, we have in the main concentrated our largest equity plays in the US.  We do not concur with what we believe to be ‘lazy investing’ amongst many of the global investment houses strategies by spreading equity investments across the globe just for the sake of it which largely service to track the respective industry benchmarks. Whilst it is an easy sell to investors to include China, Japan, Emerging Markets and BRIC regions within their investment portfolios, we would argue that to include them at the wrong time in recovery the cycle in potentially volatile times such as we have seen serves to add volatility and risk whilst producing under-performance versus the US market. The US accounts for 69% of the world’s equity index, and what the US does, other geographics tend to follow with the added beta of risk. 

There are times to add these various regions, and for higher risk clients we have considered these, but we prefer to look at sector specific equities rather than to focus on the regional geographics where we can pin-point the sectors that we feel might best take advantage of the current and evolving macro.  Socially responsible funds would come into this category, as would technology and health etc.

So we look forward to putting forward our investment proposals from Monday of next week to increase our strategic equity allocations appropriate to our client’s given risk profile as we seek to make 2022 another favourable investment year for our clients, ever mindful that to underperform inflation is simply, in real terms, losing money.

We also look forward to rolling out our more comprehensive reporting to our clients with the modular enhancements that we have made to our mid-office system IRESS-XPlan. Shannon Read has worked exceptionally hard for us on this project, and we anticipate that our clients will be enjoying the fruits of these efforts by the end of the second quarter 2022.  

NEW STARTER – INVESTMENT & BUSINESS DEVELOPMENT DIRECTOR

We are delighted to announce the arrival of David Core, who takes up the position of “Investment & Business Development Director” with the firm. David was my first recruit into financial services in January 1985 when he joined my team at a national firm of independent financial & wealth managers in the Bournemouth office.

David was Regional Director at Inter-Alliance for 10 years from 1995 to 2005, and he then set up and successfully ran his own firm “Core Financial Connections” from July 2005 to 2012.

In 2012 David joined PWS Group and worked out of Dubai, before moving back to the UK with the firm where he continued to provide investment and financial planning advice to his clients. From PWS Group, David joined Blacktower Financial Management in 2019 where he specialised in providing investment portfolio management services, corporate business services, and financial advice for overseas clients. 

Having worked with David on and off for 35 years, I am delighted that he has chosen to join our firm, where he will be a significant contributor to our investment committee, and he will also be responsible for heading up the business development effort of the firm with accountants, lawyers and trustees.

David will be based in our new satellite office in Bournemouth as we seek to grow the business in Bournemouth, Poole, Sandbanks, Lymington, New Milton, Christchurch and the surrounding areas. david.core@private-office.co.uk

Finally, if you enjoy reading this weekly update, please feel free to share it with your friends and / or family who may also find the contents of interest, and do not hesitate to contact us if you need any help, information or advice yourself about any of the areas covered this week.

Yours sincerely,