Important Market Update - Inflation and the Ukraine crisis drives market volatility

  • 28th February 2022

Following the recent dramatic events in Ukraine, we wanted to share with you the views of one of the investment managers that we deal with.

Today’s invasion of Ukraine by Russian forces has catalysed a broad fall in equity markets and investor sentiment. The human cost of the Ukraine conflict could be stark and extensive, making tough sanctions from NATO allies, and other countries globally, inevitable. Markets are already beginning to price in the inflationary consequences of the renewed surge in energy prices, particularly within continental Europe. The second order impacts of the next round of sanctions is unclear at this point however sanctions, which increase barriers to trade, by their nature are also inflationary. Today we will see how governments react and how markets expect the invasion of Ukraine to impact central bank thinking. In the meantime, our thoughts are with the people of Ukraine.

The market volatility so far this year has not however been driven exclusively by geopolitical risks and was initially caused by near-term inflationary pressures proving to be higher and longer-lasting than many, including us, expected. Responding to this inflationary pressure, central banks, including notably the Bank of England and the US Federal Reserve have in recent months communicated a greater willingness to taper and end asset purchase programmes as well as raise interest rates. Market expectations have moved aggressively to price in a rapid sequence of rate hikes over the course of this year. Whilst initially, this backdrop caused investors to reallocate from growth into value investment styles, lately, markets have started to see the risk that an aggressive rate hike cycle might threaten longer-term economic growth more broadly.

We continue to judge inflationary pressures as primarily driven by factors that will fade as the year progresses. The pandemic has driven significant distortions to economies, with imbalances between supply and demand for goods and services, and pressure on supply chains globally. We see signs that these imbalances are starting to moderate, and they are expected to continue to do so over the coming months, albeit from elevated levels. We therefore expect that the current inflation pressures will start to ease. As such, we see a lower interest rate path, both in terms of pace and scale, than what is currently assumed by markets. In the months ahead, this should allow risk assets, in particular growth equities, to see some relative recovery in sentiment. Consistent with this view, we are maintaining our asset allocation strategy of balance between growth and value investment styles at the current time.

While short-term market volatility has impacted the valuations of investor portfolios, we continue to see a longer-term constructive investing environment, with interest rates likely to remain low in absolute terms against an historical context, and a maintained preference for equities over bonds. Additionally, we are keenly aware of the value in staying invested during periods of market volatility widely reported throughout the pandemic.

As always, if you have any concerns, please do not hesitate to give us a call.

All data and figures referred to in our news section are correct at the date of publishing and should not be relied upon as still current.

Information contained within this article is not a personal recommendation of Forrester Boyd Wealth Management. The wording in this article is not to be construed as an offer or advice. We recommend you seek advice concerning suitability from your investment adviser.