It was a disappointing start to 2022 for global equity markets as the MSCI All Country World Index, a broad measure of global equity markets, fell 5% during the month. The rising rate of inflation, particularly in the US, had led investors to anticipate that the US Federal Reserve (“Fed”) would begin to hike interest rates in a bid to curb the spiralling costs of inflation. However, anticipation had not yet translated into higher bond yields or lower equity valuations, at least meaningfully so, as we closed out 2021.
The beginning of the new calendar year has now brought about the anticipated changes as expectations increased over the Fed hiking interest rates. This time round it did translate into meaningful changes as the US 10-year benchmark yield rose above 1.8%, its highest level since the onset of the pandemic. US equities have in turn experienced a sharp fall in prices as the S&P 500 Index, a broad measure of US equity markets, fell over 5% during the month. High-growth stocks, in particular technology stocks, have found themselves in eye of the storm as the Nasdaq Index declined a sizable 9% during January. This is predominantly due to the idea that high-growth technology stocks are more sensitive than most to rising interest rates.
Expectations over rate hikes were eventually confirmed following the Fed’s January meeting as the central bank’s Chairman, Jerome Powell, said that the Fed was ready to raise rates at its next meeting in March and they could be raised at a faster pace than what was seen in the previous decade. In Mr. Powell’s own words “this is going to be a year in which we move steadily away from the very highly accommodative monetary policy that we put in place to deal with the economic effects of the pandemic”. The chairman would not commit to the number of rate hikes that were going to take place nor the quantum but the consensus seems to be four to five hikes during the course of 2022.
As rising interest rates take centre stage amidst the market turmoil, the Russia-Ukraine conflict is bubbling under the surface. The potential invasion by Russia, or at least fear thereof, has brought further instability to an already fragile geopolitical landscape and has been a driving factor behind rising energy prices. Coupled with drone attacks and supply issues in and around the Middle Eastern region, the price of Brent Crude has risen above $90 a barrel, its highest level in nearly eight years. Another commodity garnering attention amidst the political turmoil is gold. ETFs backed by physical gold have seen strong inflows as many view the yellow metal as a safe-haven during market uncertainty and turmoil. The price of gold has however remained fairly range bound as the impending actions of the Fed, which resulted in higher bond yields, have taken some of the shine off bullion which ended the month slightly down at $1,795 a troy ounce.
The geopolitical risk stemming from the Russia-Ukraine crisis has also spooked other commodity markets. Were sanctions to be introduced against Russia by the US and other nations, commodity prices would likely surge and rising commodity prices reflect the possibility of this event. Russia is the world’s largest producer of palladium and we have seen the price of palladium, as well as rhodium, increase by more than 20% during January. The price of iron ore has also risen sharply as Russia is one of the larger producers of iron ore. In addition, strong demand from Chinese importers has assisted in driving the price of the bulk metal higher.
Rising commodity prices have supported the local equity market as the JSE All Share Index ended the month higher having gained a little under 1% (in USD terms the JSE All Share Index gained close to 4%). Key contributors that benefited from commodity price gains included Anglo American, BHP, Glencore, Kumba and Sasol. The local bourse was also boosted by strong performances from large banking groups such as Absa, FirstRand, Nedbank and Standard Bank. In a positive move for banks, the latest Monetary Policy Committee meeting saw the South African Reserve Bank (“SARB”) raise South’s Africa’s repo rate by 25 basis points which means the Prime rate of interest now stands at 7.5%. Compared to its international counterparts, the SARB was rather sanguine when it came to inflation, which may bode well for consumers so far as the size and quantum of future interest rates are concerned. That said, South Africans will still need to prepare themselves for a number of rate increases over the next two years.
European equity markets have held up slightly better than the US. The EURO STOXX 500 Index, a broad measure of European equities, declined 2% (in USD terms a decline of 2%)” to declined 2% (in USD terms a decline of 4%) and the FTSE 100, a broad measure of UK equities, managed a gain of 1% (a similar gain was achieved in USD terms). Much of Europe’s relative outperformance can be ascribed towards sector weightings. European markets have a lower weighting towards the information technology sector and higher weightings towards old economy sectors such as energy and financials – both sectors performed relatively well during a global equity market decline. Despite rising inflation in Europe, the European Central Bank has not been as hawkish as the US regarding rate hikes, another factor behind the region’s relative outperformance.
In Asia, the impact of rate hikes spilled over into Japanese equity markets, dragging equity prices lower as the TOPIX Index, a broad measure of Japanese equity markets, ended the month down a little under 5%. It was also a down month for mainland Chinese equities as the CSI 300 Index, a broad measure of equities listed in mainland China, declined more than 7%. Unlike the rest of the world where central banks are turning more hawkish as they focus on tightening monetary policy, the People’s Bank of China opted to cut rates by ten basis points which could symbolise China moving towards an environment of easing monetary policy.
Equity markets have endured a rough time of it but those holding cryptocurrencies such as the Bitcoin “hodlers” are white-knuckling it at the moment. The roller coaster that is the Bitcoin share price experienced a heavy fall during the month losing nearly a quarter of its value before recovering somewhat to end the month down 17% at $38,492. There are a number of factors that could be driving the steep fall in the price of cryptocurrencies. Rising yields on low-risk assets such as US government bonds lessen the appeal for high-risk, some might even say speculative assets. Another factor could be the prospect of increased rules and regulation for cryptocurrencies, particularly in the US, as well as countries seeking to ban all cryptocurrency trading and mining, such as China and Russia.