Written by Richard Warne.
After enduring the COVID-19 pandemic for the last few years and seemingly coming through the other side, I think most would have assumed that the flight path looking forward was going to be a positive one. However, Vladimir Putin’s decision to invade Ukraine certainly has thrown that proposition to the wall. The question is, how long it will last and what will the human cost be. Truly a tragic situation. This has further implications for assessing inflation, growth, and global stability. As geopolitical tensions continue to send shock waves across global markets, many questions about the prospect of stagflation (higher inflation and slowing economic growth) and recession have begun to emerge.
Last week the US banned Russian oil imports, temporarily sending Brent crude oil over $128/barrel before settling down around $110/barrel. US inflation hit a whopping 7.9%, the highest level since 1982, and the Fed signalled a 25bps rate hike at its next meeting, while German CPI touched 5.1%. Last Thursday, the European Central Bank announced that it will scale back its bond-buying stimulus programme faster than previously expected, in response to higher inflation risks. In the US, the 10-year Treasury yield rose 15bps to 1.99%, while the UK 10-year Gilt and German 10-year Bund yields rose 22bps and 25bps to 1.52% and 0.27% respectively, over the week.
On a positive note, many European banks disclosed their direct exposure to Russia with management teams reiterating that exposures are manageable, helping bank stocks and subordinated bonds such as AT1s to recover. Equity markets were generally in negative territory last week, with the MSCI All Country World Index -1.3% in Sterling terms, though we did see a relief rally in the UK with the FTSE All Share up +3.0% and the MSCI Europe ex-UK up+4.1%. We maintain a neutral stance on equities across our portfolios, with all the uncertainty that currently exists. Being tactically overweight, UK equities positively contributed to performance.
