Investment market update: February 2022

Investment market update: February 2022

Throughout February, tensions between Russia and western countries caused concern for investors. As Russia invaded Ukraine, stock markets around the world fell and it’s expected that volatility will continue.

If you’re an investor, remember to keep a long-term outlook when reviewing your portfolio, and if you have any questions, we’re here to help you.

UK

Inflation continued to be a significant influencing factor in the UK in February.

According to the Office for National Statistics, inflation reached a 30-year high of 5.5% in January. This led to the Bank of England (BoE) deciding to increase its base interest rate. While still relatively low at 0.5%, it was the second increase the Bank made in three months, and several policymakers wanted a steeper increase. As a result, the interest rate could rise again this year.

While rising inflation is affecting the cost of living overall, food and energy prices are rising rapidly.

Market analysts Kantar suggests that the annual shopping bill in the UK is set to rise by around £180 this year. Energy prices for many families will increase even more sharply. Energy regulator Ofgem will increase the energy price cap on 1 April 2022 by 54% to £1,971. This decision is expected to affect around 22 million customers.

Once inflation is considered, disposable income will shrink. The BoE expects disposable income to fall by 2% this year and by 0.5% in 2023. This would represent the biggest fall in living standards since comparable records began 30 years ago.

With this in mind, it’s unsurprising that a YouGov poll found that UK households have a gloomy outlook about their financial prospects.

Official figures show that, while GDP in the UK fell by 0.2% in December 2021, over the final quarter of last year it increased by 1%. Consulting firm EY now expects the UK economy to grow by 4.9% this year. This is down from its previous forecast of 5.6%, largely due to the squeeze on household spending power.

Trade and the effects of Brexit also continue to affect businesses across the UK.

UK exports in 2021 to the EU fell by £20 billion when compared to 2018, according to data from the Office for National Statistics. A survey conducted by the British Chambers of Commerce suggests that many businesses are facing post-Brexit challenges. 71% of UK exporters said the post-Brexit trade agreement wasn’t helping them.

While the overall figures paint a picture of an economy that is struggling to recover after the pandemic, there are some companies and sectors that are doing well. TUI, for example, reported that UK summer holiday bookings are up by a fifth when compared to pre-Covid levels.

Europe

The European Commission (EC) cut its forecast for growth in the eurozone as inflation affected economies. The EC now expects the eurozone to grow by 4% in 2022. This compares to its forecast of 4.3% in November 2021.

Inflation in the eurozone reached a record 5.1% in January – significantly higher than the 4.4% forecast. The figure is more than twice the European Central Bank’s target of 2%.

While inflation is presenting some challenges for households and businesses, there was some good news in Europe. The eurozone unemployment rate fell to a record low of 7%, which compares to a rate of 8.2% a year earlier.

Investors in eurozone bonds may also have benefited from high levels of inflation. In expectation of an interest rate rise, bond yields have lifted.

Danish shipping firm Maersk also demonstrates how some firms have profited from the current situation. Thanks to the global economy rebounding, the firm posted record profits.

US

Much like the UK and the rest of Europe, the US is experiencing high levels of inflation. According to the Bureau of Labor Statistics, inflation hit 7.5% in January – a 40-year high.

Unsurprisingly, consumer confidence has been affected by the pressure caused by high inflation, as well as the economic outlook. The University of Michigan’s consumer sentiment barometer fell to its lowest levels since late 2011.

Some key figures suggest that the US economy could be struggling to recover from the effects of the pandemic. The US manufacturing sector’s Purchasing Managers Index in January was at a 15-month low with a reading of 55.5. While the figure still represents growth, slower demand and firms struggling to hire staff meant the pace is slowing.

In addition, ADP Jobs reported an unexpected drop in jobs in January as businesses cut 301,000 positions. The leisure and hospitality industry was the hardest hit.

Statistics also show the US trade deficit has reached an all-time high. The gap between imports and exports jumped by 27% in 2021.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.