March Issue 2022
Summary
Over a month has passed since Russian armed forces first invaded Ukraine. While the initial shock of the invasion has now passed, each day brings new stories of human suffering and courageous defiance.
Equity Snapshot
| United States | • | US equities recovered from a weak start to March to close the month moderately higher. The rally helped the S&P 500 Index to regain levels last seen prior to the Russian armed forces’ invasion of Ukraine. The tech-heavy Nasdaq also regained its pre-invasion level, having briefly entered a bear market in mid-March. In a reversal from the previous month, large-cap stocks outperformed smaller companies, although both advanced, whilst growth stocks marginally outpaced value ones. |
| • | As widely expected, the Federal Reserve (Fed) raised rates by 25 basis points to a range of 0.25% to 0.5%, marking its first rate hike since 2018. Policymakers also forecast six further rate increases in 2022, plus a further three in 2023. Fed chair Jay Powell hinted that the US central bank may be prepared to act more aggressively if needed to keep a lid on prices, pushing back concerns that this may cause a recession. | |
| Europe | • | European equities overcame early weakness to close March with relatively flat returns, although they recovered most of the ground lost in late-February on news that Russian armed force had invaded Ukraine. EU countries tightened sanctions against Putin’s government and announced measures to help businesses and individuals impacted by the invasion of Ukraine, but the block remained divided over whether to ban imports of Russian energy. On the last day of March, Putin’s government said it will stop supplying gas to countries deemed to be “unfriendly” unless they pay in rubles, causing several EU countries to make preparations for gas rationing. |
| • | The European Central Bank (ECB) announced it was accelerating the scaling back of its bond-buying programme. It also raised its inflation forecasts for 2022 to 5.1%, from an earlier estimate of 3.2%, citing the “exceptional energy price shocks” stemming from the Russian armed forces’ military aggression. ECB president Christine Lagarde warned of “new inflationary trends” and said that the invasion “posed significant risks to growth”. | |
| Asia | • | Equity markets in Asia delivered mixed returns in March. China saw Covid-19 case surge across multiple cities, sparking fresh lockdowns and factory closures. The Covid situation remains elevated in Hong Kong but generally there was improvement towards the latter half of the month. Taiwan equities also weakened throughout March due to concerns that manufacturing operations located in mainland China would be affected by factory closures. Elsewhere, South Korean equities ended March with positive gains as the Covid situation appeared to have peaked towards the middle of March and exports rose to record levels. Thailand's market was relatively flat, whereas returns in Singapore performed strongly on better reopening prospects. |
| Bond | • | US Treasury bond yields moved sharply higher as speculation rose that the Federal Reserve would need to be more aggressive in raising rates to tackle inflation. The yield on the 10-year Treasury yield briefly broke through 2.5% for the first time in almost three years before closing the month at just above 2.3%, an increase of around 50 basis points over the month. Shorter dated US Treasury yields rose even more, causing the yield curve to partly invert. An inverted yield curve is often viewed as an indicator of an impending recession. While Treasury Inflation-Protected Securities also declined, they outperformed nominal Treasuries. |
| • | European bonds sold off in March amid concerns that the Russian armed forces' invasion of Ukraine would heighten inflationary pressures across the EU. In Germany, the yield on the 10-year benchmark bond closed at 0.55%, a rise of about 40 basis points over the month. In the five-year part of the curve, yields turned positive for the first time in more than four years. Yields on peripheral euro-zone bonds also increased, although the upward movement was less marked than in core markets amid reports that the EU was considering joint bond issuances to finance energy and defence spending. | |
| Outlook | • | Over a month has passed since Russian armed forces first invaded Ukraine. While the initial shock of the invasion has now passed, each day brings new stories of human suffering and courageous defiance. As the conflict becomes more and more drawn out, the clearest outcome at this stage is the unified response from Europe, the United States and other NATO-aligned countries. |
| • | Financial markets are similarly moving beyond the immediate impact. Sanctions on Russia have made the country all but uninvestable, and large multinationals which previously had a presence in the region are clarifying how their operations look without it. As nations seek to make alternative arrangements, some of the sharpest price rises in commodities like oil have pulled back, albeit modestly. Investors are now being forced to consider the conflict’s long-term implications. | |
| • | Inflation was already front of mind before the conflict erupted. Further supply chain disruption will sustain price rises which are beginning to have knock on economic effects. As real wages are squeezed, and disposable income is reoriented to essentials like food and heating, the result will likely be slower economic growth. Some consumers may prove more resilient than others, thanks to a backlog of pandemic savings, but in time these too will dwindle. | |
| • | The conflict is also likely to engender new trends, as well as accelerating existing ones. Germany’s pledge to increase defence spending has struck a chord across many other countries that were demilitarising. This in turn has forced asset managers to reflect on the sector’s place within a “sustainable” investment universe. And if the energy transition, along with food, commodity and technology security were already relevant themes in an increasingly deglobalized world, the conflict has made them only more so. | |
| • | Broadly, many of our Healthcare names showed strength in March, and some recovery in IT was also helpful. Some of our weakest performers are still having to qualify their business model’s strength beyond their recent Covid-19 boost. However this rotation, along with the still highly sentiment driven market, are providing opportunities for us as bottom-up stock pickers with a much longer time horizon. | |
| • | We look ahead with confidence, holding numerous companies among our various portfolios that help consumers and businesses cut costs, indirectly support the energy transition, and can gain from technology localisation. It is one of our investment philosophy’s key principles that identifying and investing in longer-term structural shifts can sustain meaningful growth that is less correlated with the global economy. When paired with demonstrable pricing power, we believe our high-Quality businesses are well positioned to navigate this uncertain environment. | |
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Note: The Ukraine crisis and the related sanctions against the Russian Federation, the separatist regions of DNR and LNR, and Belarus are constantly evolving. The statements included herein are as of the date provided and are subject to change.
Sources: 1 Eurostat 2 Bloomberg 3 Office for National Statistics
Information herein is based on sources we believe to be accurate and reliable as at the date it was made. We reserve the right to revise any information herein at any time without notice.
No offer or solicitation to buy or sell securities, nor investment advice or recommendation is made herein. In making investment decisions, investors should not rely solely on this material but should seek independent professional advice. Investment involves risks, in particular, risks associated with investment in emerging and less developed markets. Past performance is not indicative of future performance.
This material has not been reviewed by the SFC in Hong Kong and is published for information only.
Issued by Allianz Global Investors Asia Pacific Limited.
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April Issue 2022
Summary
Inflation and subsequent central bank rate hikes continue to be this year’s single biggest driver of equity markets. This can partly be ascribed to Russia’s invasion of Ukraine, which has driven up the prices of energy, corn, wheat and a range of industrial commodities.