A turbulent start to 2022 for investment markets
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Neighborhood in brief
US stocks had their worst month since the start of the pandemic and many wild stocks often experienced intra-day price swings
UK golden yields continued to rise sharply
The Bank of England announced on February 2 that it is raising interest rates from 0.25% to 0.5%
Investment markets saw big, volatile moves throughout January as investors grew concerned about the various issues facing global economies and markets. Snowballing levels of inflation have necessitated preparations by central banks to tighten monetary policy at a faster pace than previously thought.
US stocks had their worst month since the start of the pandemic; the tech-heavy S&P 500 and Nasdaq fell 5.3% and 9%, respectively, which would have been worse if not for a strong equity tick over the last two days of the month. Many stocks have seen erratic intra-day price swings and the sell-off has been particularly prominent in technology and growth stocks, where valuations have long been seen as stretched, although broader sectors are not at risk. ‘shelter. Companies such as Netflix, Spotify and Tesla all priced in the double digits saw declines during the month. UK equities, where valuations have been significantly lower, generally fare better.
Investors have seen a marked change in the tone of the US Federal Reserve (the Fed), which has become increasingly hawkish on inflation. At its January meeting, Jay Powell, Fed Chairman, strongly indicated that he plans to begin the rate-up cycle in March. He also confirmed that he will now complete his bond buying program in early March. The speed of this wind-down call obligation and its refusal to decide on a more aggressive string of interest rate increases surprised investors. Markets are now within nearly five of pricing U.S. interest rate hikes in 2022 from three previously. Rising interest rates reduce the value that investors place on future earnings which can affect equities as well as bond markets.
Geopolitical tensions, particularly in Europe, also weighed on market sentiment. The West remains at an impasse with Russia, which appears to be using the threat of an invasion of Ukraine to achieve a series of “security guarantees”. The outcome of this situation remains uncertain and could have significant implications for the world, both politically and economically.
Wider corporate bond credit spreads, reflecting a perceived heightened risk of default. Coupled with the rise seen in golden yields, this led to a tough month for investment grade and high yield bonds.
GDP data released in January for the UK showed the economy surpassed its pre-pandemic level for the first time in November. While overall growth continues to be strong, there are still signs that it is slowing. The continued spread of Omicron globally is likely to be one of the contributing factors to this slowdown, although the impact will be more limited in countries with lower vaccination rates.
UK golden yields continued a remarkable rise seen since early December as investors shifted their expectations around policy action needed to fight inflation. The 20-year golden yield ended the month 0.6% pa higher than it was at its lowest point in December 2021. The Bank of England raised interest rates in its February announcement from 0.25% to 0.5%. CPI hit 5.4% in the UK in December.
The estimated overall funding position of UK DB pension plans, long-term, whipsawed on January, but ended slightly higher due to higher gilt yields.
Source: XPS DB: UK www.xpsgroup.com/services/xps-pensions/xps-dbuk-funding-watch
The charts above are based on data from the pension regulator, the PPF 7800 Index and the XPS data pool. Assumptions used in the UK: DB long-term target base include golden yields discount interest rate plus 0.5%. Debt asset allocation is 16.9% equities, 20.0% corporate bonds, 6.9% multi-asset, 5.1% property, 3.8% markets private and 47.3% with the liability-based investment overlay (LDI) providing 60% inflation and interest rate coverage.
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