Financial markets have started 2022 on a volatile note as concerns about central banks tightening their monetary policy aggressively increase and geopolitical tensions rise.
Markets start the year in the red
After a strong 2021, stock markets have fallen - in many cases, quite sharply- in the first few weeks of 2022. The falls have been driven by increasing concerns that central banks will start reining in the monetary support they gave economies through the pandemic in order to combat inflation. The Federal Reserve (the US central bank) has said it is ready to raise interest rates in March if it needs to. Meanwhile in the UK, the Bank of England, was the fit-st major central bank to raise interest rates in December 2021 and is likely to go further this year. Rapidly rising interest rates are typically bad news for companies where the investment case rests on expectations of profits a long way into the future, such as some in the technology sector. This is because higher interest rates reduce the current value of their future profits. Furthermore. higher interest rates increase the cost of borrowing for companies, which is particularly problematic for companies who do not yet make a profit. A lot of these companies aI·e based in the US, and it is therefore understandable that the US stock market has taken the biggest hit so far.
It's not just about central banks
Whilst concerns about central banks removing support abruptly has been a key driver of markets, there are of course other factors. Many companies are reporting challenges to their businesses, be that supply chain issues, higher costs or softening earnings. For example, when Netflix announced that it is forecasting to add 15 million fewer subscribers in the first three months of 2022 compared to 2021, its share price crashed 20% in a single day. Furthermore. escalating geopolitical tensions around the Ukiraine/Russia border, weak economic data from China and rising Covid-19 cases in some parts of the world have also caused markets to jitter.
Not everything is down
Whilst dearly a lot of areas of the market have fallen significantly, there are other areas that are holding up particularly well against the broader market environment. For example. BP and Shell have both benefited from a rise in oil price, travel and hospitality
shares are in demand as the UK eases restrictions, with British Airways owner IAG doing particularly well this year so far. Banks who typically do well in a rising interest rate environment have also done well this year.
Let's not forget to think long-term
Whilst markets have had a tricky start to 2022 and as an investor you may feel nervous about the short-term market volatility, it is important to put things into the longer-term context that you are investing for. The recent fall. whilst sharp, is still modest in comparison to what equity markets have returned over the last few years. The fact that markets can have sharp dips and periods of uncertainty like the one we are seeing now means you should really be willing to invest for a minimum of five years.
Your attitude to risk
Markets are like roller coasters, there will be periods of stellar market performance and periods of sharp dips. Some people enjoy the thrill of a rollercoaster whilst others prefer to go for less adventurous experiences_ And of course, some people can't afford to go on a rollercoaster (for medical reasons for example). The same principles apply to your investment portfolio. Your willingness and ability to ride and tolerate the markets highs and lows, together with your investment time horizon. dictates the overall mix of asset classes in your portfolio which in turn will dictate how much of the market volatility you experience.
Our 2022 Investment Outlook
The world continues to be in a state of flux, so things are likely to move in different directions at different times throughout the year. This creates uncertainty for investors who will be closely watching the likely directions of three key variables - economic growth, inflation and interest rates. As the world works its way through these uncertainties. it would be reasonable to expect a higher level of volatility in markets over the shorter term but our outlook for markets remains positive over the medium term. To help shape our view of the long term and guide our approach to investing over the year ahead, we've identified five key issues we think are going to determine the outlook for economic growth. inflation and interest rates, which you can read about it here.
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Issued by Omnis Investments Limited. The document is for informational purposes only and is not investment advice. The views expressed here are those held the time of issue and are subject to change. We recommend you discuss any investment decisions with your Openwork financial adviser. Omnis is unable to provide investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given. The value of an investment and any income derived from it can fall as well as rise and you may not get back the original amount invested. Past performance is not a guide to future performance.
The Omnis Managed Investments ICVC and the Omnis Portfolio Investments ICVC are authorised Investment Companies with Variable Capital. The authorised corporate director of the Omnis Managed Investments ICVC and the Omnis Portfolio Investments ICVC is Omnis Investments Limited (Registered Address: Washington House, Lydiard Fields, Swindon, SN5 8UB) which is authorised and regulated by the Financial Conduct Authority.
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