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Capital Markets Update: February 2023

NOVA Wealth1 March 2023

Market updates from February

In a Nutshell

A year on, the drastic humanitarian and economic impact of Russia’s invasion of Ukraine is still apparent. Inflation continues to put pressure on central bank policymakers; and resource security still occupies a central place in global political discussions. Meanwhile, UK markets showed positive movement over the month, but this was offset by renewed concerns around cost of living. Chinese markets saw a slight dip in February although continue on a path of recovery.

Russia’s invasion of Ukraine - a year on

Since the Russian invasion the global equity market has experienced rough waters. Numerous multinational companies - including McDonalds and H&M - have ceased trading in Russia; and Russian companies like Gazprom have been excluded from many international market indices.

Inflation (led by energy prices), rising interest rates and the political uncertainty from the war led to bearish equity market behaviour that lasted until September 2022 for all global markets. Over the last 12 months, US equities and emerging markets were impacted the most.

One-year performance of Global equities

Global Markets One Year After Russia’s Invasion of Ukraine MSCI, 2023

Real yields remained high compared to recent months, but investors looking to buy up bonds and other fixed-interest products want to assess the actions of central banks if anti-inflation efforts fail.

As Ukraine is a major transit country for Russian gas exports, the conflict has disrupted supplies to Europe, leading to higher energy prices and concerns about energy security. However, the war has caused an uptick for hydrocarbons as countries seek alternative energy sources - which has potential to accelerate decarbonization in the long run, increasing energy security and limit exposure to volatile fossil fuel prices.

Spikes in energy prices impacted consumers and industries, particularly for countries reliant on energy imports from Russia. The EU has been vulnerable to the economic consequences of Russia’s invasion as they are highly dependent on energy resources.

European headline inflation increased to 8.4% in 2022 from 2.6% in 2021, and energy and food inflation contributed to two thirds of this in 2022. The Ukrainian hryvnia has also depreciated significantly since the conflict began, leading to higher inflation and lower purchasing power for consumers. The Russian ruble has also been affected, with the currency declining in value due to increased economic uncertainty.

The conflict has led to a significant humanitarian crisis, with thousands of people displaced and in need of assistance. This could have longer term economic implications, as the country struggles to rebuild and recover.

In general, markets have recovered slowly and shown economic resilience to the effects of the war. The situation remains fluid, and the ultimate economic impact will depend on the duration and severity of the conflict as well as on the response of the international community.

EU inflation softens to 8.5% as ECB signals interest rate increases are not over

Following comments from the European Central Bank chief, bringing inflation rates down may take a while and further interest rate rises are not off the cards.

Positive news is inflation is falling, with headline rates as high as 10.6% in October but revised to 8.6% in January. However, headline inflation came in at 8.5% in February, indicating that prices are not falling rapidly. Government bond yields have been moving at a multi year high, whilst hawkish monetary policy is here to stay.

UK markets show positive movements

We’ve had some positive news out of the UK this month. UK equities have fared well, with the FTSE100 index reaching a record-high price by mid-February. Overall, the index grew around 1.4%, led particularly by the energy, health and telecoms sectors.

The Bank of England have revised their estimates of economic growth for 2023 - while recession is still very much on the horizon, it’s likely to be shallower than predicted in initial November reports. This is in part due to recent drops in wholesale energy prices, which has been a driving force behind inflation over the last year.

However, GDP statistics published this month by the ONS show that recession was only narrowly avoided in Q4 of 2022, with growth rates flatlining in November and December. The trade deficit between the UK and EU has also widened, with imports rising to £82bn against total exports of £49.2bn. This, alongside continuing inflation, suggests a difficult year ahead.

Concerns over living costs are also ramping up again as we draw closer to the end of Truss’ energy bill subsidy. Some MPs - including the Shadow Chancellor Rachel Reeves - have called for “a proper windfall tax” to fund continuation of the subsidy. However, Hunt has insisted that the government cannot afford to continue beyond the current timeframe - so unless the support scheme is extended, we could see around a 40% increase in consumer energy costs in April. That said, it’s hoped that warmer weather ahead and stabilising gas prices will soften both actual usage and any limit increases to actual household bills.

Chinese stocks dip, but continue trend of recovery

Asia (ex Japan) equities saw negative performance over February, driven in large part by a decline in Chinese stocks. The S&P China 500 index shows a broad market decline of around 3%. There was a particular drop in Hong Kong stocks - the Hang Seng fell 3.5%. However, recovery from the market lows of 2022 remains strong overall as China continues to re-open its economy.

Over the last two years, we’ve seen trends in Chinese stocks decoupling from wider markets. This can be partly attributed to China’s relatively late re-opening from stringent COVID restrictions. This initially meant slower recovery from the pandemic than other economies. However, recent opening-up has led to increased levels of tourism and rapid economic recovery - indeed, the S&P China 500 index has shown 2.57% YTD growth.

Looking ahead

A year in the Russia-Ukraine conflict shows little sign of slowing down. We are deeply saddened by the continuing humanitarian tragedy, and I think we all hope this year will see Russian de-escalation and resolution. As the conflict continues however, we can expect markets to remain volatile. In such an economic environment, it is vital to look long term and remain diversified to limit the impact on your assets.

Important information:

The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation.

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