Market Commentary February 2022

Aetas Wealth

January’s headlines were dominated not only by reports of lockdown parties in Downing Street, but also by growing tension on Ukraine’s border.

Russian President Vladimir Putin massed his tanks on the border, with the Chair of the Commons Defence Committee saying that an invasion was “imminent and inevitable”, and a top Polish official said that Europe was at its “highest risk of war for 30 years”. With so much of Europe reliant on Russian gas to keep warm – and to power industry – there are real worries that Russia could ‘weaponise’ the supply of gas as the crisis in Ukraine continues.

Meanwhile, World Bank president David Malpass said that the global economy faces a “grim outlook” in 2022, as the Bank predicted that global growth will slow to 4.1% this year, from 5.5% in 2021. It attributed the slowdown to continued threats from Covid, government aid and stimulus packages being wound down and to the post-pandemic rebound in demand fading.

Oil prices hit a seven-year high following an attack on a storage facility in the Middle East and plenty of commentators wondered about rising energy prices pushing the world into recession. Also in January, North Korea conducted another missile test which was, apparently, its biggest launch since 2017. (Anyone wondering how North Korea can afford all these missile tests may find a possible answer in this month’s And Finally… section).

As always, let’s take a look at all the details, and see how January’s news affected the major stock markets around the world.

Perhaps January’s main theme in the UK related to our personal finances. The month ended with Prime Minister Boris Johnson and Chancellor Rishi Sunak confirming that the rise in National Insurance planned for April – and which applies to both employers and employees – will go ahead. The move was criticised by the CBI, which said the increase would ‘squeeze budgets’ and risked ‘stunting’ economic growth.

With an article in City AM suggesting that the average UK household energy bill could rise by 50% in April (when the price cap is set to increase), personal spending is going to come under real pressure. You suspect that the cost of living will be one of this year’s recurring arguments. With the personal tax allowance and higher rate threshold frozen until 2026, it could be a ‘triple whammy,’ as many of us will find ourselves pushed into a higher tax bracket.

January was the month when Covid restrictions ended in the UK. While many people will continue to work from home at least part of the time, the ending of restrictions will be a welcome boost to town centres and the ‘commuter economy’. Google certainly placed a hefty bet on ‘the office’, announcing a £730m investment to ‘re-invigorate’ the UK work environment and increase its headcount from 6,400 to 10,000.

The UK car industry was, as always, in the news. Sales of electric cars soared in 2021 despite the chip shortage, with more new vehicles registered than in the previous five years combined. Overall, though, 2021 was a disappointing year for the industry, with production down to its lowest level since 1956. While the Society of Motor Manufacturers and Traders says it is ‘optimistic’ about the future – with new investment worth £5bn in the pipeline – hopes that production would recover last year were dashed. Just under 860,000 new cars left UK factories in 2021 – a stark contrast to the numbers quoted below for Toyota.

In the wider economy, the Omicron variant took its inevitable toll, with the service sector particularly badly hit. The Purchasing Managers’ Index for the sector showed that activity for December fell to 53.6, sharply down on the 58.5 recorded in November. Omicron hit the high street, with retail sales down 4% in December – although the supermarkets enjoyed a good festive period with all those reporting saying they had beaten their Christmas forecasts.

So what of the coming year? We have commented on the World Bank forecast above: the big worry, of course, is energy prices, which will reduce consumers’ spending power and push up industry’s costs. Figures from the ONS for November showed that the UK economy grew by 0.9% between October and November, helping it to surpass pre-Covid levels for the first time, with the economy 0.7% larger than in February 2020.

We are certain to see increases in base rates in the coming year as the Bank of England seeks to keep a lid on inflation, with Sir Charlie Bean, an ex-deputy governor, warning of a series of rate rises in the coming months. Rising food prices pushed inflation to 5.4% in December, the highest it has been for 30 years.

House prices also rose sharply in December. The Halifax said prices rose by 9.8% in 2021, the fastest rate of increase since the 12.5% seen in 2004. The Nationwide House Price index was even more bullish, suggesting a rise of 11.2% last year, with the average price of a house at £255,556.

The FTSE 100 index of leading shares wasn’t quite as bullish as Nationwide’s index, but it was one of the few world stock markets to gain ground in January. It closed the month up 1% at 7,464. The pound fell 1% against the dollar to end at $1.3451.

Perhaps Europe’s biggest story of last year was the election of Olaf Scholz as the new German Chancellor, following Angela Merkel’s decision to step down after 16 years.

This year will bring us the French Presidential Election. Emmanuel Macron will stand for re-election and – at the time of writing – is the overwhelming favourite to win a second term. Who will be Macron’s challenger? Marine le Pen is always a candidate, but may lose out to right-wing journalist and pundit Éric Zemmour. Quite possibly though they will both be beaten by Valérie Pécresse, presidential candidate from the centre-right Républicains and current leader of the greater Paris region.

All our clients will be aware of soaring gas prices, not just in the UK but across Europe. Germany is perhaps more vulnerable than most countries, being heavily reliant on gas from Russia. Despite this, the government is moving ahead to close three of its six remaining nuclear plants, a commitment in the aftermath of the Fukushima meltdown – and a move championed by the Greens, who are now a part of the ruling coalition.

The German government remains committed to its economic stimulus package, and there are suggestions that it will transfer €60bn (£50bn) of Covid funds to an ‘energy and climate fund’. Whether this will boost the economy is the subject of much debate. A boost may be needed as figures released in January showed the Eurozone Purchasing Managers’ Index falling to 53.3 in December, from the 55.4 recorded in November, the lowest figure for nine months.

The reason, of course, was the tough measures introduced in all European countries as the Omicron variant swept across the continent. In Italy, Prime Minister Mario Draghi is pressing ahead with plans to make vaccines compulsory for all those over 50.

It was a poor start to the year for Europe’s major stock markets. Germany’s DAX index fell 3% to 15,471 while the French stock market ended the month down 2% at 6,999.

There was plenty of positive news to start the year in the US. The first day of trading after the New Year holiday saw both the S&P500 index and the Dow Jones hit record highs. Tesla shares jumped 13% after strong sales figures, and despite the supply chain problems, the company beat its own record, delivering 308,600 vehicles in the fourth quarter of the year. Sales for 2021 as a whole were up 87% on the previous year.

In the same trading session, Apple briefly became the first company to hit a valuation of $3tn (£2.24bn) before the shares slipped back slightly – although they are up 5,800% since Steve Jobs unveiled the first iPhone in 2007.

Inevitably, though, bad news wasn’t far behind. Tesla – record sales figures or not – was roundly criticised for opening a showroom in China’s controversial Xinjiang region.

2021 was, unsurprisingly, a year of record jobs growth in the US as the economy recovered from the pandemic, but the jobs figures for December were disappointing. Although the jobless rate dropped to just 3.9%, US employers hired just 199,000 people in December, well down on previous months.

We have commented extensively on the threat of inflation in previous Bulletins: early in December the White House was said to be bracing itself for a ‘brutal’ inflation report as the President’s disapproval ratings hit an all-time high. The figures did not disappoint the pessimists, with US inflation up to 7% year-on-year in December, the highest figure for more than 40 years.

Like all central banks around the world, the Federal Reserve is likely to push up interest rates to try and contain inflation. But it will be a delicate balancing act, with some commentators worrying that raising rates too much might push the economy into recession.

To bring us full circle – at least in this section of the Bulletin – the month ended with more positive news from both Tesla and Apple. Tesla boss Elon Musk said sales would grow by 50% in 2022, as the company reported a $5.5bn (£4.1bn) profit for last year. Apple also defied the chip shortage as sales rose 11% to a record $124bn (£92bn) in the last three months of the year.

So was Wall Street cheered by Apple and Tesla or weighed down by worries about inflation and recession? Despite the good start to the month, it was the latter, with the Dow Jones index falling 3% in the month to 35,132 while the more broadly based S&P 500 index fell 5% to 4,516.

Far East
‘Crackdown’ was a word that we seemed to use increasingly in the Far East section of the Bulletin in 2021 – and it was well to the fore in January.

Speaking to the World Economic Forum’s annual meeting, President Xi Jinping defended his ‘common prosperity’ programme – and the crackdowns on technology, education and entertainment firms which now seem an integral part of it. The implementation of the policy has seen billions of dollars wiped off the value of some of China’s biggest companies as international investors understandably start to worry.

Shareholders in property giant Evergrande – and anyone who has lent money to the company – have been worrying for some time. The month started with the shares suspended in Hong Kong as the company sought to raise cash. The shares rose as trading resumed; the company left its head office building to save cash… And so it went on. Whatever happens with Evergrande, the simple fact is that the Chinese property sector has huge problems. At the time of writing, the government appears torn between boosting liquidity in the sector (letting the property companies borrow yet more money) or yet another crackdown: early in the month, Evergrande was ordered to demolish 39 buildings in 10 days, which must have sent a shiver through investors’ hearts.

The property sector was far from the only potential problem in the Chinese economy. Several ports were locked down over Covid fears (with inevitable knock-on supply chain problems) and there were real worries that the economy as a whole was slowing down, with the Purchasing Managers’ Index for January falling to 50.1 – as regular readers know, any figure below 50 indicates that an economy is contracting.

With the economy growing by 4% in the final quarter of the year – above expectations but well below the previous quarter – and inflationary pressures apparently easing, the People’s Bank of China cut interest rates for the first time since April 2020.

By contrast the Bank of Korea raised South Korean rates for the third time in six months, lifting the rate to the pre-pandemic level of 1.25% as it looks to contain inflation and soaring household debt.

January was an excellent month for Japanese carmaker Toyota. It ended General Motor’s 90-year reign as the top car seller in the US. Toyota’s sales rose 10% to 2.3m vehicles, as GM – hurt by the shortage of semiconductor chips – saw its sales fall 13%. Worldwide, the company is aiming to make a record 11m vehicles in its fiscal year 2022/23, which would beat its 2016 record.

Whatever the success of Toyota, it did little to cheer the Japanese stock market, which fell 6% in January to end the month at 27,002. China’s Shanghai Composite index fared even worse, dropping back 8% to end the month at 3,361. Hong Kong’s Hang Seng index, in contrast, rose 2% to 23,802.

The biggest fall of all the markets we cover came in South Korea, where the index – hit by a wave of selling triggered by fears of further interest rate rises – fell by 11% in January to close at 2,663.

Emerging Markets
In Turkey, inflation reached 36% in December, the highest figure for 19 years. Transport and food price rises hit household budgets hard, as the central bank raised interest rates to try and cool the inflationary pressure.

That theme – the problems we report on in the major economies being felt everywhere – was much in evidence in January. We have written many times about the chip shortage which is hitting car production in countries like the UK and Germany. Figures for December showed that car production in Mexico had slumped to its lowest level for 11 years: production dropped 16.5% compared to the previous year, to just over 212,000 vehicles in the month.

Meanwhile, cybercrime has become a growing problem in North Korea. According to one analysis company, hackers targeting investment firms and centralised exchanges apparently stole $400m (£298m) of crypto currencies in 2021 – 40% up on the previous year.

There were wildly different fortunes for two of the major emerging markets we report on in the Bulletin. The Russian stock market had a poor start to the year, falling 7% to 3,530. Brazil’s market went in exactly the opposite direction, gaining 7% to close at 112,144. The Indian market was unchanged in percentage terms at 58,014.

And finally
December 2021 was a vintage month for the ‘And Finally…’ section of the Bulletin: perhaps the best on record. The first month of 2022 couldn’t quite reach those heights, but the year still got off to an interesting start.

In December we brought you news of Vishal Garg – the boss who sounds like a bad mouthwash and who sacked 900 people via a Zoom call. After a period of ‘rest’ Mr Garg is back at his desk. The ‘And Finally…’ section welcomes you, sir. Don’t let us down…

Mr Garg, though, may be feeling a sense of disappointment as he turns to his breakfast bagel. Hacking and the damage done by cyber-criminals was a recurring theme through last year – and not just in North Korea. New Yorkers in particular felt the impact of hacking over the festive season. In October, Schreiber Foods was ‘crippled’ by a cyber-attack – meaning that by December, New York was struggling with a shortage of schmear – a slang term for the cream cheese spread on a toasted bagel. One publication reported that traumatised New Yorkers were having to resort to putting butter and jam on their bagels – ‘like an Englishman…’

Breakfast in America was under even more pressure when it was reported that pork supplies were down 4.1% on a year ago – due to ‘declining hog herds’ – meaning that stocks of bacon were at their lowest level for 11 years.

Here in the UK, a great many people had a falling out with their energy supplier as they received unwelcome advice. Some energy companies told customers worried about the rising cost of keeping warm to do star jumps or ‘cuddle their pets’. Eon decided that a gift was the best way to help, and sent 30,000 customers a pair of polyester socks.

The socks carried the message ‘leaving lighter footprints’ – or, as it’s often pronounced, ‘change your energy supplier’.

But it’s an ill-wind, as the old saying has it. As we all stayed at home and struggled to keep warm, retailers reported that shoppers were swerving party outfits in favour of ‘loungewear.’ With the Christmas festivities cancelled, we were all back in our PJs and tracksuit bottoms.

Let’s hope Communities Secretary Michael Gove was suitably dressed when he visited the BBC. There to talk about ‘levelling up’, Mr Gove sadly found himself stuck in the lift for 30 minutes. The BBC reported that Mr Gove and the security man trapped with him were “keeping cheerful”.

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