Quarterly market update
Q1 2022: Markets show their resilience
Investment highlights from 1st January to 31st March 2022
Published: April 2022
At a glance
- Stock markets recovered in March after falling in January and February.
- Russia’s invasion of Ukraine and rising inflation and interest rate rises were the biggest concerns.
- We believe inflation, while staying higher for longer, should settle later this year.
Three developments this quarter relevant to Royal Bank Invest
Russia’s invasion of Ukraine
The tragic human cost of the Ukraine invasion continues to dominate headlines and people’s concerns, quite rightly. But without a doubt it had a big impact on investment markets too.
Stock markets fell by up to 4% right after the invasion in February, and the oil price rose to well over $100 a barrel, reaching an eight-year high.
Our view: By the start of April, all major stock markets were higher than their pre-invasion levels. Uncertainty remains, but in time markets should re-focus on the broader economic picture and company performance – both of which remain relatively robust.
Cost of living keeps going up
Inflation continues to soar to record highs, and central banks have been raising interest rates to get it back under control. Higher interest rates can hit company share prices because they raise their borrowing costs while discouraging people from buying their products.
Our view: A big reason behind current price rises is a combination of stronger demand and constrained supply – partly caused by supply shortages due to the pandemic. But higher inflation should eventually reduce demand and bring prices back down. We therefore believe inflation will settle in the latter part of this year, although it’s likely to remain higher than we’ve been used to.
Bother for bonds
Rising inflation and interest rates are typically bad for government bonds. If interest rates go up, they make the fixed rate of interest you get on your bond less attractive, so the bond itself loses value. Government bonds have therefore been struggling so far this year.
Our view: In the past, when central banks started raising interest rates, government bonds did indeed fall in value. But once those higher rates started taming inflation, conditions improved for bond investors. So we still see government bonds providing important diversification in our funds going forward.
“When a geopolitical crisis hits and outcomes are uncertain, we’re guided by history, which suggests these events tend to be short-lived in markets. Eventually, the larger macroeconomic backdrop prevails.”
Executive Director, Coutts, which runs the Royal Bank Invest funds
The big number: 4.1%
Managing your money
Changes the experts at Coutts have made to the Royal Bank Invest funds
Buying more UK stocks
Just after the three months we’re covering here, in early April, we bought more UK stocks.
The UK market has a relatively high proportion of sectors that tend to do well when inflation is running high, like energy, and those that do better when economic growth slows, like health care.
Selling European stocks
At the end of November we sold some of our European stocks.
Slowing economic growth and less central bank support made it a good time to reduce our exposure slightly.
The degree to which these developments will affect your investment’s performance depends on which NatWest Invest fund you hold. You should continue to hold cash for your short-term needs.
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We regularly update our articles depending on what’s happening in the market so check back for future updates.