As we go into the second quarter of 2022, we look at how different asset classes and stock markets have been performing, which funds and sectors have been the winners and losers over the past quarter and key themes driving markets at the moment.

You probably do not need me to tell you that the first quarter of 2022 has provided a challenging backdrop for investing. Just as the world was emerging from the COVID-19 pandemic, Putin decided to invade Ukraine, sending shockwaves around the world and resulting in the west declaring financial war on Russia. It is no surprise that volatility has been elevated and investment markets have been in ‘risk-off’ mode as the conflict escalated.

Asset classes

Even before the invasion, stock market investors had started the year in a cautious frame of mind due to concerns over inflation and rising interest rates. The UK has continued to raise interest rates and the US Federal reserve started raising rates to combat inflation. It is no surprise that the first quarter of 2022 has seen falls across most stock markets. It is maybe more surprising that the MSCI World Index fell back just 4.6% over the quarter.

The key economic impact to date from the invasion has been on commodity markets, where Russia is a key supplier in many areas which has caused a surge in the price of energy, as well as many metals and food supplies. The dramatic impact of the crisis on commodity prices is illustrated by the Bloomberg WTI Oil Price index rising by 38.3% in the first three months of 2022.

During times of market stress, investors traditionally favour the security that bonds can provide. However, high commodity prices are likely to lead to prolonged inflation, the enemy of bond markets. One such sign could be the negative return of -6.2% in the first quarter produced by Bloomberg Global Aggregate index, a widely used benchmark for Government and corporate bonds around the world.

In contrast, the desire for inflation protection and secure assets during this market uncertainty has seen gold provide a safe haven and the gold price posted a strong quarterly return of 6.6%. Property and infrastructure benchmarks have also risen over the quarter (4.2% and 3.7% respectively).

Regions

The trend for global stock markets has clearly been downwards with plenty to worry about; but there has been a clear disparity between performance across different regions, sectors and investment styles.

Despite the turbulent backdrop the UK stock market produced a positive return, with the CBOE UK All Share index generating a 1.3% for the quarter. The UK benchmark index has significant weighting in energy and mining stocks, which have benefited from the rise in commodity prices, as well as financial companies which benefit from rising interest rates.

In contrast, many other European developed markets have had a torrid quarter with the benchmark falling by 8.2%. Europe is the region most economically integrated with Russia and the MSCI Europe Ex UK index dropped over 17% at one point, before paring losses late in the quarter on hopes of a resolution to the conflict.

The US S&P 500 index fell by 4.7%, although this masked a disparity across different areas. The dominant technology sector has had a difficult period with concerns over how rising interest rates would affect earnings dragging the Nasdaq index down by 9%.

In Asia, the Japanese stock market index TOPIX proved relatively resilient falling by just 1.4%, as investors deemed it to be relatively resilient to the fallout from the invasion. At the other end of the spectrum, Chinese markets have continued to have a terrible time. Investors shunned the region based on geopolitical concerns over its reluctance to call out Russia, as well as the impact of the zero-Covid policy on economic growth, resulting in the MSCI China Index falling 13.9% in Q1.

The underperformance of China and risk aversion from the invasion unsurprisingly left most Asian and emerging markets in negative territory. The MSCI Asia Ex Japan and MSCI Emerging Markets indices fell by 6.7% and 6.1% respectively. But one emerging market that notably benefited from the rocketing commodity prices was Brazil which was the standout stock market in emerging markets – with the Brazil Bovespa index returning 14.5% in the first quarter.

Lastly, one of the marked differences in stock market performance in the past quarter is reflected in Value outperforming Growth. The MSCI World Value index fell by just 0.1%, whereas the MSCI World Growth index was down by 9.1%. An environment of inflation and rising interest rates is proving more favourable to a traditional Value investing style, which currently tends to invest in sectors such as commodities and financials, compared to Growth investors which currently tend to invest in for example technology, which is more susceptible to the negative effect of rising interest rates.

TILLIT Universe

Given the high level of risk aversion and the inflationary environment, it’s no surprise to see funds focused on precious metals in the top of the Top 5 Performers in the first quarter. The best performing fund for Q1 was the Invesco Physical Silver ETC, which tracks the price of silver, and the iShares Physical Gold ETC wasn’t far behind. Jupiter Gold and Silver came in third, which offers a mix of direct exposure to the gold and silver prices and precious metals mining company stocks.

Another top performer was Polar Capital Global Insurance. Insurance is primarily a necessity with demand largely unaffected by the economic environment, which means it can be a good option for investors looking for more defensive areas of the stock market. The fund managers of this strategy prefer small and mid-sized non-life insurance companies with focused underwriting strategies.

Finally, GLG Japan Core Alpha benefitted from both regional focus on Japan and a Value tilt style of investing. The strengthening yen also provided a tailwind for this sterling-denominated fund.

With the level of investor caution it has been a particularly difficult quarter for funds focusing on higher-risk areas of stock markets. The worst performer in Q1 was The Biotech Growth Trust, which fell by 24.4%. The potential to benefit from ground-breaking science that can transform healthcare in the long-term is a key reason to invest in this sector, however the general negative sentiment around higher risk assets has weighed on the sector. Another bottom performer in Q1 was Scottish Mortgage Investment Trust, which fell 23.3% suffering from a similar effect of higher-risk areas such as biotech and technology being shunned by a lot of investors.

After some exceptional returns recently, Montanaro European Smaller Companies Trust was also hit hard in the quarter as investors reduced their exposure to investments sensitive to the European economy on the back of Russia’s invasion of Ukraine.

As discussed earlier, China was another area of the market that suffered in Q1. After a difficult Q4 in 2021, the start of 2022 hasn’t been much better and Fidelity China Special Situations fell by 19% in the quarter. Valuations in the Chinese stock market are now at historically low levels but concerns over a new East v West cold war emerging, alongside the continued effects of COVID-19 on the Chinese economy, have spooked a lot of investors.

Lastly, despite Japanese equities broadly holding up well in Q1, FTF Martin Currie Japan Equity fell by 17% in the quarter, as investors shied away from higher-risk parts of the market such as small and mid-caps and high-growth sectors such as technology.

Interestingly, four out of the Bottom 5 Performers were investment trusts. This is not uncommon in a ‘risk-off’ environment, especially when gearing is employed by the investment trust.

Looking ahead

Volatility in markets is likely to remain elevated at least until there is a resolution to the Russia/Ukraine conflict. Whilst it may not lead to an extended large-scale military conflict, the economic war declared on Russia may have a long-term impact on European economies and stock markets in general. Europe depends on Russia for a lot of its commodity requirements, particularly energy. Spiralling commodity prices due to the invasion mean that inflation is now embedded into the economy for the foreseeable future. The latest UK CPI reading of 5.5%¹ is the highest we’ve seen in a decade and it is predicted to rise above 8% in the Q2².

It is now accepted that we are entering an environment of steadily rising interest rates to try and combat inflation (although it is questionable how effective a tool this is). Central banks will continue to walk a tightrope between controlling inflation and avoiding aggressive interest rate rises that may derail economic growth. Investors will continue to keep a close eye on Central bank activity and a number of rate rises are already factored into asset prices.

The global economic and political uncertainty is unsettling for investors and concerns have understandably been significantly heightened by the Russian invasion of Ukraine. But it is also important to remember your reasons for investing and the timelines of your goals. Some of the most famous investors in the world talk about when others are fearful, there may be a good buying opportunity (paraphrased from Warren Buffett) and there have been significant price falls in many parts of the markets in recent months. And if the situation in Ukraine can be resolved quickly, then higher-risk assets may see an upturn in performance as investors will be keen to seek out opportunities that can generate a positive real return. We certainly hope that such a resolution can be found, and not just for the sake of the markets.

Sources: FE Analytics (quarterly performance figures for funds and market 31/12/21 to 31/3/22). Qualitative commentary from Tillit meetings with fund managers.

¹ https://www.ons.gov.uk/economy/inflationandpriceindices

² https://www.bankofengland.co.u...

Date of publication: 7 April 2022