By Haith Nori
April has been another testing month with the Ukraine crises still dragging on having not reached a resolution.
Inflation has continued to be a sore point for the markets and in the US headline CPI exceeded 8% for the first time in four decades. US Treasury Yields have also increased, with the US 10 Year Treasury hovering around the 3% mark, a level which has not been seen in more than three years. Commodity prices also remain high, having reached all-time highs in March. This is still a root cause of inflation, in particular the price of oil and refined products. The WisdomTree Enhanced Commodities fund still lingers close to the highs of March (1597p), ending the month slightly lower at 1541.65p.
In a questionable attempt to reduce inflation, Central Banks are planning to raise interest rates and all eyes are on Jerome Powell to take further action at the May meeting following much media speculation over the last month. Rate expectations in the US have risen to extreme levels, and ‘by next February, the rate – still stuck at zero at the beginning of 2022 – could, if the market is right, reach 3%(i). Undoubtedly, a radical change like this will have a large impact on US markets, especially in the short term and will also have a knock-on effect throughout global markets. The Bank of England remains the only central bank to have taken the action of increasing interest rates to 0.75% and are set to have another meeting on 5th May to potentially increase these once more. This following the UK’s headline rate of inflation having climbed to 7.0% in March from 6.2% in February, its highest level since March 1992.
On Tuesday 26th April the Euro dropped to a five-year low against the dollar, falling below levels last seen during the worst of Covid panic in March 2020. This is a significant factor exerting increased pressure on the European Central Bank (ECB). The fundamental reason for a weakening euro is the level of expectations for rate hikes in the US, which greatly exceed those expected from the ECB who face a far more challenging economic environment. The weaker euro will likely mean that imports into Europe will become more expensive and could drive a further increase in inflation as the cost-of-living places significant strain on households.
Within portfolio’s we have an increased focus on diversification as well as maintaining exposure to real assets and companies which have sufficient pricing power to pass on increases in operating and input costs. In our view these are the best approaches toward preserving capital over the long term.
Share prices have been affected by companies deciding to close their operations in Russia. For example, Stellantis saw a 5% reduction in its share price after their announcement on Tuesday 19th April to suspend ‘operations in Russia’ (ii).
Netflix sparked a 33% decrease in its share price, following ‘the news that Netflix’s subscriber base had declined by 200,000, quarter on quarter, announced late on Tuesday 19th April when analysts had been expecting continued strength in new subscribers (iii). Investor confidence is already low, and Netflix served as a prime example of a stock that suffered from extended valuations following lockdown growth. There has been a move away from Growth and Value and a shift towards Quality stocks. In hindsight the fall of 200,000 subscribers isn’t a significant impact given the previous figure was 221,840,000, so the fall in the first quarter was just 0.09%. Furthermore, Netflix also made the decision to close its Russian operation during this period which most certainly had an impact together with the fact that we are nearing the end of the pandemic, where Netflix saw a great increase in subscribers. The decline in share price is largely due to a future projection in declining growth. Netflix ended the month at a share price of $190.36, after starting the month at $373.47 which is 49% lower!
‘The NYSE Fang+ index, home to the big internet platform groups that were treated as the best shelter from the pandemic, has sold off so sharply that it has now lost 20% just since the beginning of April’ (iv). As an example, Alphabet saw its share price fall from $2803.01 at the beginning of April to end April at $2282.19, a reduction of 18.58%. Meta Platforms (formerly Facebook) started the month at $224.85, was down 22.19%, but had a late surge before finishing the month at $200.47, 10.84% lower.
To conclude the S&P 500 started the month at 4545.86 and has dropped by 9.1% to 4131.93. There has been a dramatic reduction of 20% in the famed FANGs over the course of the month. The FTSE 100, began the month at 7537.90 and ending 7537.28, remaining relatively flat. The German GDAX began April at 14,446.48 and finished 14,097.88 down 2.41%, while the French CAC40 began April at 6684.31 ending at 6533.77 down 2.25%. The Italian MIB reducing 3.62%, beginning April 25,163.3 to end at 24,252.16. To combine with the disappointing European Equity performance, the Euro has fallen to its all-time low against the dollar which will drive inflation higher in Europe. Japan’s Nikkei 225 began April at 27,665.98 and ended April 26,847.9 giving a reduction of 3.0% and the Yen is sitting at a 20 year low to the USD as the BOJ continues to follow very loose monetary policy. Brent Crude has reduced in price from its March highs of $127.98 to $109.34 having started the month at $107.53.
Overall, it has been a disappointing month for most asset classes that are not linked to commodities. The best performers continue to be real assets, and companies with enough pricing power to avoid suffering from inflation.
i Bloomberg Points of Return – Be Warned – From a Reverse in Stocks to Stability in France
ii https://www.ft.com/content/2941f41a-2689-4fd3-8c32-b253253590dc
iv Be Warned – FANGS and the Euro Crash Into Crises of Expectations
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