What a difference a month can make. January 2022 saw a more negative market environment after December’s strong positive returns. There were several reasons for this increased volatility, with monetary policy and the heightened Russia-NATO standoff regarding Ukraine being two significant drivers. We’ve provided a full analysis of the start to the year and examined the factors that are having an impact on investments here: https://www.wealthify.com/blog/a-bumpy-start-to-the-year.
As expected, inflation is continuing to be a key theme in 2022, with supply chain issues and higher manufacturing costs, combined with pent up demand, causing inflation rates to increase across global economies. Data released in January showed that UK inflation continued to climb in December, up from 5.1% to 5.4% year on year (yoy), reflecting an increase in prices for goods and services.
In the US, inflation also increased from 6.8% to 7.0% yoy for December. Meanwhile, Eurozone inflation, hit another 30-year high, increasing from 4.9% to 5.0%, on the back of surging energy costs and ongoing supply bottlenecks.
Data released in January (for December) showed that the UK’s services and manufacturing sectors are continuing to grow. Although this was at a slower pace than the previous month, the data exceeded what economists forecasted. Given the robust growth they achieved in previous months, slightly softer numbers should not be a cause for concern as they’re still running at healthy levels.
Despite this slowing growth, the UK economy continues to positively edge its way to pre-pandemic levels. UK unemployment fell to 4.1% from the previous month’s rate of 4.2%, moving closer to the pre-pandemic levels of 3.8% achieved in 2019. Job vacancies in the UK hit a new record high in the last quarter of 2021, with 1.25 million vacancies, the highest figure since ONS (Office for National Statistics) started publishing figures in Q4 2002. This marks an increase of 460,000 vacancies compared to pre-pandemic levels.
In January, we saw a ‘sell-off’ across global stock markets which resulted in a turbulent start to the year. Rising inflation which has been caused by a combination of ongoing supply chain issues, wage pressures in a tight labour market, and increasing energy prices have seen central banks around the world re-evaluate their stance on interest rates. The focus has now shifted from growth towards inflation, so going forward, monetary policy is likely to be tighter and interest rates will be higher than was expected at the end of 2021. This has had a particularly negative effect on stock markets dominated by technology, healthcare, and consumer discretionary sectors such as the USA. The FTSE-100, which has a larger allocation to energy and financial sectors, was the only major index to see a positive return for the month (+1.08%). Emerging Markets (-1.93%), Europe (-3.88%), Asia Pacific excl. Japan (-4.01%), US (-5.26%), FTSE-250 (-6.62%), and Japan (-7.85%) all ended the month negatively. The effects of foreign currency movements on investment performance are discussed below.
Sterling rose in value against many major world currencies including the euro (+0.56%) but weakened in value against the US dollar (-0.63%) and the Japanese yen (-0.61%). The US dollar strengthened against most major currencies as investors factored in the likelihood of the US Federal Reserve increasing their interest rates quicker, and potentially higher, than other major central banks. There were some exceptions, for example, countries that produce sought after commodities, 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 denominated in US dollars and yen will have benefitted from the weakened sterling, and while shares denominated in euros wouldn’t have seen this uplift.
Investment type performance breakdown
Property (-5.09%) and shares (-3.87%) both dropped from their positive performance in December, and bond prices also fell (-1.58%) as yields showed a sustained, general increase throughout January. This undoubtedly reflects increased investor focus on rising inflation levels and the measures, most importantly the likely accompanying interest rate hikes, that central banks will be taking to help stabilise prices of goods and services.
Summary with Plan details
Due to market conditions, all our investment Plans performed negatively in January. Plans that have a higher allocation to 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.
While periods of negative returns can be uncomfortable, even for the most seasoned investors, they are to be expected – particularly in the short-term and after a sustained period of healthy, positive returns. Our focus remains on the long-term objectives of each Plan, and we remain steadfast in our approach.
Our Investment Team continue to actively monitor the financial markets and their impact on your Plan, and as always, we are ready to act in your best interests to events as they unfold.
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.