We understand that it has been a challenging start to the year for most, from both a personal and an investment perspective. The conflict in Ukraine has shocked us all, and our thoughts are with those who are being affected.
February 2022 was a difficult month for investors. The first half was focused on monetary policy, mainly concerned with the number of interest rate hikes that central banks would be expected to deliver throughout the year to get inflation back under control. However, the second half of the month was dominated by the conflict between Russia and Ukraine.
As a result of the latter, both Brent and WTI (West Texas Intermediate) oil breached $100 a barrel at the end of February, and this figure continues to trend higher. The surge in energy prices resulting from the conflict has also boosted inflation expectations. However, central banks will remain cautious of increasing interest rates which could negatively impact economic growth, given that the situation is still developing.
Although inflation is no longer front-page news, it is still very much an ongoing issue. Data released in February showed that UK inflation continued to climb in January, up from 5.4% to 5.5% year on year (yoy), reflecting a real term increase in the prices of goods and services. In the US, inflation also increased from 7.0% to 7.5% yoy for January. Meanwhile, Eurozone inflation hit yet another 30-year high, increasing from 5.0% to 5.1%, on the back of surging energy costs and ongoing supply bottlenecks.
Data released in February (for January) showed that the UK’s services and manufacturing sectors are still continuing to grow. Although this was at a slower pace than the previous month, the data exceeded what economists forecasted. Meanwhile, UK unemployment remained at 4.1% with job vacancies hitting another new record high between November 2021 and January 2022, with 1.3 million vacancies. This is the highest figure since ONS (Office for National Statistics) started publishing figures in Q4 2002.
Markets
In February, stock markets continued to be turbulent. Interest rate expectations were the main focus in the first few weeks of the month, as markets speculated the future path central banks would take to normalise interest rates. In the final two weeks of the month, attention shifted to the increasing cost of energy as Russia’s invasion of Ukraine drove the prices even higher. Russia (1st) and Ukraine (5th) are two of the world’s largest exporters of wheat, and Russia is also the world’s largest exporter of fertiliser, both are key components in food production and have contributed to rising prices and increasing inflation rates.
The FTSE-100 was the highest performing market for the second month in a row, due to a larger allocation of energy and financial sectors, however, it ended the month slightly down on the previous month (-0.08%). Asia Pacific excl. Japan (-1.35%), Japan (-1.76%), Emerging Markets (-3.06%), US (-3.14%), Europe (-3.36) and the FTSE-250 (-3.86%) all ended the month negatively.
The effects of foreign currency movements on investment performance are discussed below.
Currency
Sterling weakened in value against many major world currencies, including the Japanese yen (-0.30%), the US dollar (-0.20%), and was relatively flat against the euro (-0.06%). The demand for US dollar and Japanese yen increased, as investors typically flock to these currencies when there is increased market volatility. Currencies linked to commodity-producing countries, such as oil, saw demand for their currency remain high as these purchases are typically made in the producing country’s currency.
The performance of shares held in US dollars, the euro, and yen will have benefitted from the weakened sterling.
Investment type performance breakdown
In Original Plans, shares (-2.18%) and property (-1.21%) fell for a second consecutive month. Bond prices also fell (-1.02%) as inflation and interest rate expectations continued to weigh them down.
In Ethical Plans, shares fell further (-3.15%), with the difference reflecting the minimal exposure to oil, gas and energy, which were among the sparse sectors benefitting from the current economic conditions. Bonds (-1.24%) also fell because of the concerns over inflation and higher interest rate expectations.
Summary with Plan details
Due to market conditions, all our Investment Plans, both Original and Ethical, performed negatively in February. Plans that have more shares and property, such as our Ambitious and Adventurous models, had lower performance than those Plans with more bonds, such as our Cautious and Tentative Plans.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.Past performance is not a reliable indicator of future results.
