Global stock markets have shown further signs of stress following the Federal Reserve Bank’s indication that it might quicken the pace of its interest rate rises. The ongoing Ukraine conflict has not helped matters, and Putin’s recent declaration that any further Western intervention would be perceived as a strategic threat to Russia and would be met with a “lightning-fast” response triggered another pullback in risk assets.
Tensions have been exacerbated by Russia’s state-owned Gazprom announcing that it would cut off gas supplies to Poland and Bulgaria unless both countries agreed to pay in rubles. This move was widely condemned by political leaders around the world, including by Ukraine’s Volodymyr Zelensky who denounced it as an attempt to blackmail the world – something the Kremlin was quick to deny.
Meanwhile, Russia looks set to default on its sovereign debt. Sanctions imposed in response to the incursion have resulted in the MSCI and JPMorgan removing Russian debt from widely tracked bond indices.
The Credit Derivatives Determinations Committee says that a “potential failure-to-pay” event already occurred for credit-default swaps when Russia paid bondholders in rubles instead of dollars – after foreign banks declined to process US currency transfers.
Should Russia fail to pay up (in dollars) by the time its grace period ends on 4 May 2022, this will be its first default on external debt in more than a century. The Kremlin, however, says that the West has already defaulted on its own obligations to Russia by freezing its reserves. Now it wants a new system to replace the Bretton Woods financial architecture that the West put in place in 1944.
Because of the sanctions that have been applied to it, Russia’s economy is now heading for its worst contraction since the collapse of the Soviet Union in 1991. Inflation is spiralling and capital is leaving the country at breakneck speed. In short, the picture looks bleak for Moscow.
In Asia, China has dramatically ramped up its Covid-19 mass-testing programme following an increase in cases. The spectre of further lockdowns is giving rise to concerns over possible consequences on the Chinese and global economy. This has resulted in a sharp sell-off in the Chinese stock market, which has gone on to hit Western markets.
The US technology sector has been leading the decline, with the tech-heavy NASDAQ Composite Index hitting a fresh 52-week low, retreating further into bear market territory. To complicate matters further, we are now in the midst of the US corporate earnings season… and a number of global investors are a little unsure about the short-term outlook for profits. This goes some way to explaining the heightened volatility we are seeing in the markets.
The strength in Big Tech stocks over recent years has left them vulnerable. Indeed, with inflationary pressures mounting, central bankers becoming more hawkish, the Ukraine conflict worsening, and concerns increasing oversupply bottlenecks, there is no shortage of headwinds to affect market sentiment when it comes to technology and other sensitive sectors.
On a more positive note, recent valuation compression within the Big Tech stocks – and the overall sector – has triggered a valuation reset. And we think this offers long-term investors an excellent entry point.
Following a dramatic and sobering first quarter of 2022, many traders and global investors are struggling with macroeconomic shifts, geopolitical developments and stock market declines. Concerns over inflation, interest rates and the tragic events in eastern Europe are unequivocally impairing investors’ ability to achieve short-term returns. But in equity markets, there are always direct beneficiaries of any bad news.
Over the last few months, those beneficiaries have obviously been energy and commodity producers – they have seen significantly higher turnover and increased profitability. And needless to say, companies with pricing power that are able to pass on their higher costs to the consumer have also benefited. Although no sector has strong pricing power right across the board, sectors such as consumer staples, luxury goods and utilities are all pricing power beneficiaries.
Over the last few months, stock market volatility has been at the forefront of many investors’ minds. This has led to them keeping a little cash on the sidelines. While cash may indeed be “king” over a very short-term time horizon, it is not a terribly good bet for growing your money – unless, of course, interest rates are extremely high. Therefore, investing makes sense.
As we always say, sensible asset allocation is crucial, and your wealth should be split across two silos. You need some long-term time horizon money, and a little short-term cash – just in case life deals you a difficult hand and you need to access it instantly.
Always bear in mind that times such as these, when the stock markets are selling off ruthlessly, are excellent opportunities to buy phenomenal companies that have seen their share prices tumble – albeit for all the wrong reasons.
If there is one thing I have learned over the years, it is that calm, courage and common sense in the face of even the worst crisis will see us through: a sound investment will eventually pay off and outperform cash plus inflation.