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Market Insights, February 21, 2022

Each week, our Investment team shares its market views with you !

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L'essentiel

US consumer spending has not been dented by surging inflation, which is now above 7% year on year. Retail sales rose 3.8% in January, far outstripping economists’ expectations. These figures have been driven up by consumer optimism and very low unemployment as the pandemic comes to an end. 

Investors’ still-fragile confidence took another knock when the Chinese authorities told online food delivery platforms to reduce their fees – the latest in a string of recommendations aimed at shoring up industries hit hard by the pandemic. However, we don’t see this as the start of a new round of regulations but rather a temporary move to support the uptick in consumer spending. 

Alternative funds have maintained their strong momentum even though markets are under pressure. After limiting their losses in January, alternative funds have, on average, posted positive returns in February as global stock and bond markets continue to move downwards.

Gold's appeal in times of crisis

Tensions surrounding Ukraine continue to weigh on the global financial markets. The English-speaking media keeps sounding the alarm about an imminent invasion by Russian troops. First they claimed to have reliable US and British intelligence that an invasion would take place on 16 February but then decided it wouldn’t happen until after the Beijing Winter Olympics. So far, Russia has not invaded, although there has been an increasing number of border skirmishes between Ukrainian forces and pro-Russian militia in the self-proclaimed republics of Donetsk and Luhansk in eastern Ukraine.

Based on what we know, it is difficult to work out exactly what Vladimir Putin is looking to gain, as his actions could trigger further sanctions that would hurt the Rus-
sian economy over the long term. Is he just looking for guarantees that the North Atlantic Treaty Organization (NATO) will stop expanding to the east? Or is he trying to reclaim Russia’s place in the global geopolitical order currently dominated by the US and China. And what concessions is the West willing to make to prevent a crisis that could destabilise Europe once again and harm its energy supply?

For the moment, there may still be a diplomatic route out of this crisis, and high-level talks are continuing between Russia and the West. It seems likely that the two sides can still negotiate a solution. But for that solution to last, they will have to make sure that neither side loses face. In the meantime, the slightest spark could send everything up in flames.

Stock markets have lost ground recently and investors are very bearish, which suggests that this risk has been partly priced in. If Russia does invade, we can’t rule out further stock market declines, and the extent of those declines will depend on energy prices. The more oil prices rise in response to events in Ukraine, the greater the impact on the stock markets will be. But if a diplomatic solution is found, the political premium is likely to disappear and stock markets should bounce back out of relief.

Given these two possible outcomes, we think gold offers the best prospects when it comes to hedging portfolios. That’s why we’ve increased its weighting in our portfolios – we’ve upped our exposure by 2% in our balanced portfolios, for instance.

 

Europe's toing and froing on Ukraine

It’s been a tricky start to the year for Europe’s financial markets. They were caught off guard by the change in tone from central banks – particularly the European Central Bank – in response to the longer- and steeper-than-expected rise in inflation. On top of that, geopolitical tensions have been mounting around Ukraine. These concerns have shaken stock and bond markets simultaneously, which is a rare occurrence. As is often the case dur-
ing political crises, commodities – and particularly oil – have done well.

Bond markets must now price in changing expectations about rate hikes, but the tensions surrounding Ukraine are much more complicated and much less predictable. Europe is particularly vulnerable to events in Ukraine, given its proximity and its dependence on Russian oil and gas. If Russia invades and new sanctions are imposed, Europe won’t be left unscathed. In this scenario, investors are likely to remain risk-averse, and central banks will be in less of a hurry to normalise monetary policy.

Looking further out, that could lead to new investment opportunities on European stock markets. If a diplomatic solution is found, which we think is the most likely scenario, investors will quickly regain their appetite for risk and European stock markets will bounce back, boosted by the sharp uptick in output as economies reopen.

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