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Conflict continues in Ukraine, interest rates and inflation are rising and a renewed outbreak of COVID-19 has caused uncertainty in China and called the efficacy of the Sinovac vaccine into question. Whilst strict lockdowns in Shanghai and Shenzhen are scheduled to be eased on 1st June, a degree of economic damage and supply chain constraints are to be expected as these are major production and transit centres.

The IMF published its influential world economic outlook towards the end of April. As expected growth forecasts were reduced in response to the Ukraine crisis. The International Monetary Fund has dropped its forecast for global growth. It is now estimating 3.6% growth for 2022 and 2023, a 0.8% and 0.2% drop respectively since the January forecast, due to “economic damage” from the conflict in Ukraine.  However, global growth was always expected to slow from the 6.1% recovery it achieved in 2021.

Commodity prices have continued to be relatively high with Brent oil now trading at $111, although this price is down from the March peak of $129.

UK and US monetary policy has once again tightened to combat inflation. On 5th May, The Bank of England hiked interest rates by 0.25% in its fourth consecutive rise, bringing them to 1%, their highest level since 2009. In the US the Federal Reserve raised interest rates by 0.50%, to a range of 0.75%-1.0%.

Financial markets have remained volatile with the MSCI World index falling -3.84% in the month of April and -6.74% in the year to 13th May in Sterling terms. Additionally, bond markets have been impacted by continued high inflation and interest rate increases. For instance, the Investment Association Sterling Corporate Bond fund sector average has declined 2.51% in April and -7.74%  in the year to 13th May. It has been challenging that equity and bond prices have both seen volatility so far in 2022. However, there are signs of more attractive valuations in equity markets and also interest rates are creating higher yields for bonds, for instance benchmark 10-year US treasury yields are now 2.93%, up from just 0.62% in July 2020.

The UK market has proved to be an outlier in the year to date with the FTSE 100 gaining 0.76% in April and 1.9% in the year to 13th May. It is one of the only major indices to be in positive territory in Sterling terms in this time period. It has been advantaged by the number of resources and financial services companies within the index which benefit from higher commodity prices and increasing interest rates respectively. Our model portfolios continue to have ample exposure to large UK company equities and we maintain our holdings in the iShares Core FTSE 100 ETF.

To conclude, we believe it is best to navigate the current uncertainty by staying invested with long term returns in mind, rather than to engage in the risks associated with market timing or to hold high cash holdings which would be eroded in real terms by inflation. Additionally, a number of our carefully selected equity fund choices aim to invest in companies which have pricing power. Companies with pricing power can potentially pass on any increased costs due to inflation to help protect profit margins.

This article is for information purposes only. It does not constitute advice and is not a recommendation to invest. The value of investments may go down as well as up and you may not get back your original investment. Past performance is not a guide to the future.

The information in this article is correct as at 17 May 2022

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