Investment Update — April 2022
The direct effects of the conflict in Ukraine are over 10,000 deaths, the displacement of millions of people from their homes and the destruction of the Ukrainian economy. The indirect effects have the potential to be economically damaging upon the rest of the world. Ukraine and Russia are both large producers of agricultural commodities and industrial metals which have seen an increase in costs, while sanctions on Russian energy have pushed oil and gas prices higher.
Unfortunately for central banks, these inflationary pressures come at a time when inflation is already well above target, growth is slowing, and consumer confidence is falling.
The US central bank (The Fed) is expected to increase interest rates, and we now expect a small number of large hikes, rather than a longer period of small hikes. The Fed is hoping to engineer a “soft-landing” by raising rates so that demand weakens and unemployment rises, without causing a recession. However a higher unemployment rate has historically caused a recession.
The Bank of England (BoE) and European Central Bank (EBC) are stuck between a rock and a hard place. Economic growth is weaker in the UK and EU than in USA, but they face the same inflationary pressures. The UK government has already taken steps to alleviate the cost of living, and they are likely to do more. We expect to see the BoE raise rates only once or twice more, while the ECB may not raise rates at all this year.
The picture isn’t so rosy for the UK economy. Energy prices, which were already high have risen even further, national insurance contributions are rising and personal tax allowances are being frozen. According to the OBR, this all amounts to the biggest drop in living standards on record.
The global economy is facing its sternest test since the onset of the pandemic. But a recession is not yet inevitable. Consumers are sitting on excess savings, inflation may soon peak and central banks may not deliver as many hikes as the market expects. We may also see more aggressive Chinese stimulus and a negotiated settlement or ceasefire in Ukraine.
If you have any questions, please don’t hesitate to contact us.
Head of Investment, Skerritts
Please note: These are our views, as always, and don’t constitute advice in any way. The value of investments can fall as well as rise and past performance is not a guide to the future. The content of this publication is for information only. It does not represent personal advice or a personal recommendation, and should not be interpreted as such. Please do not act upon any part of it without first having consulted an Independent Financial Adviser.
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