Q1 2022
The first quarter of 2022 brought a challenging environment for stock market investors, with a decline in growth shares and the ongoing war in Ukraine impacting market conditions.
The quarter was marked by significant concerns surrounding inflation, which had been rising since the latter half of 2021. Supply shortages across various sectors of the global economy, resulting from the post-pandemic recovery, contributed to inflationary pressures. These shortages were evident in commodities such as semiconductors and cars. The invasion of Ukraine by Russia further intensified these pressures, leading to a surge in oil and gas prices due to European and G7 sanctions on Russia. The agricultural sector also experienced disruptions, particularly in wheat and sunflower oil production in Ukraine.
Despite its historical underperformance, the UK market, particularly large-cap stocks, emerged as the top-performing equity market during the quarter. The market benefited from its heavy exposure to the energy sector and basic materials. Investors also rotated away from growth-oriented sectors and markets, seeking opportunities in lower-valued assets as concerns grew over the impact of rising interest rates on highly valued assets. In contrast, continental European equities faced challenges due to their reliance on Russian oil and gas, the impact of sanctions on the European economy, and the physical proximity of the war.
The rotation towards value-oriented sectors and stocks continued, with previously lagging sectors delivering strong relative performance compared to growth-focused sectors. The energy sector, in particular, benefited from the Russian invasion and the resulting sanctions, which raised concerns about energy supply to continental Europe. This led to a surge in oil and natural gas prices, triggering a negative impact on consumer-related sectors such as retail, travel, and automotive. Highly valued growth companies and sectors also faced selling pressure as investors anticipated the negative impact of central bank rate increases to combat inflation.
In the bond market, inflation spikes above 7% rattled investors, leading to increased demand for higher yields and consequently lower bond prices. Fixed-income assets had already been under pressure due to persistently high inflation, which reached levels not seen in over a decade. The situation worsened as the implications of the war in Ukraine on commodity supply chains became apparent. Emerging market debt in US dollars, UK corporate bonds, and UK government gilts were among the worst-performing fixed-income assets, while inflation-linked bonds were relatively less impacted.
The oil and gas sector, along with commodities in general, experienced strong rallies during the quarter. The invasion and subsequent sanctions amplified concerns about energy supply shortages that were already evident. The implementation of unprecedented sanctions raised fears of severe supply disruptions. This impact extended to agricultural staples such as wheat and sunflower oil, as Ukraine, a major producer, faced significant production disruptions, leading to soaring prices and subsequent effects on other agricultural products.
Property investments demonstrated resilience during the quarter, with most direct property assets experiencing upward revisions. However, real estate investment trusts (REITs) globally ended slightly negative due to their short-term correlation with equities. Infrastructure assets, on the other hand, delivered positive returns, benefiting from their involvement with or exposure to rising energy prices. Gold also performed well, delivering nearly double-digit returns, as it served as a store of value during the Eastern European conflict.
