WeeklyWatch – Market confidence dented in light of Ukraine crisis

01 February 2022

Stock Take

Market reactions

Difficult trading conditions played out again last week, as a hard-line stance from the US Federal Reserve and continued geopolitical tensions alarmed investors.

Following a broadly positive 2021 as far as markets were concerned, 2022 has thus far been much more testing – and these challenges endured for many global markets over the past week, including the S&P500 and the NASDAQ.

Concerns surrounding a Russian invasion of the Ukraine continued to mount, as no resolution was achieved from talks – hurting market confidence. An invasion of this kind would represent the largest military action in Europe since World War II – potentially leading to a wider economic knock-on effect due to promised Western sanctions on Russia.

Inflationary dynamics

The situation was further complicated for investors towards the end of the week, given that the Fed disclosed that an interest rate rise would “soon be appropriate”. Having already started to taper down the other fiscal stimulus measures implemented during the pandemic, this move from the US to begin increasing rates came as no surprise.

Chris Iggo – AXA IM Chief Investment Officer, Core Investments – said:

“The pandemic is largely responsible for the increase in inflation since the spring of 2021. However, investors are not sure whether inflationary dynamics have moved beyond those generated by supply disruptions and backlogs. Wage growth has picked up and the global energy situation creates additional complexity. With unemployment rates in the major economies within a few tenths of a percentage point of their pre-pandemic lows, and with inflation likely to remain elevated for the rest of this year, monetary tightening is warranted and inevitable.”

A range of factors have contributed to the drops in US indices, yet headline figures can be ambiguous. While the overall US markets may be down, the level of the fall is emphasised by declines from the major tech players.

For example, on Friday, Adrian Frost from Artemis noted:

“Each of the MegaCap-8 stocks has fallen more sharply than the S&P 500…The MegaCap-8 is down 15.7%, the S&P 500 is down 9.2%, and the S&P 500 excluding the MegaCap-8 stocks is down 7.4%.”

Several of these tech stocks featured amongst the strongest performers in 2021, yet the recent changes are a stark reminder about the need for a well-diversified portfolio.

Market timings

Aristotle Capital Management’s Jim Henderson spoke recently, saying that while inflation, interest rates and geopolitical events were having a negative impact on markets, recent falls weren’t out of character, from a historical point of view.

He commented:

“Every now and then, a correction in the marketplace is warranted and healthy. And generally speaking, you’re going to get a 10% decline off of market highs every couple of years. That’s just the way the market works.”

What’s more, this slump could, in fact, prove to be beneficial for shrewd managers over the long term. The reason behind this is that the recent market drop may have brought the prices of some companies to a level such that managers are prepared to make an investment or top up existing positions.

It also pays for investors to remember the old saying of ‘time in the market, not timing the market.’ Consistently and successfully timing market rises and falls is exceptionally tricky, if not impossible, and misjudging the time to buy and sell can have long-term financial consequences.

Wealth Check

Fear of missing out – otherwise known as FOMO – can be a helpful motivator. That said, it’s all too easy to overlook the tax reliefs and allowances that can really boost your financial health.

For your money to go further, you need to maximise your tax allowances. The most obvious of these is the ISA allowance – this lets you put up to £20,000 into an ISA in the current tax year, without paying any tax on the interest or profits.

In addition, you have a Personal Savings Allowance, meaning you can keep interest on savings of up to £1,000 this tax year if you pay Income Tax at the basic rate (£500 for higher-rate taxpayers).

Neither of these annual allowances can be carried over to the next tax year – it’s a case of ‘use it or lose it’. With that in mind, it’s worth planning ahead to maximise the benefits, says Tony Clark, Senior Propositions Manager at St. James’s Place.

“The tax-year-end deadline is there for the allowances to be used, but it’s just a deadline – you have a whole year to use them.”

Such allowances can make a veritable difference to your chances of meeting your long-term financial goals.

At a time of so much uncertainty and with so much to do now – let alone in the future – this can, of course, sound so much easier to do in theory than in reality.

A good way to ease the pressure and ensure you’re not missing out on potentially valuable tax benefits is to speak to your financial adviser.

“You’ll have short, medium and long-term goals, so an adviser will guide you on the allowances available and how to plan your investments around your different objectives,”

Clark explains.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA or a deposit with a bank or building society.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

The Last Word

“There will be enormous consequences [for Russia] if he were to go in and invade…not only in terms of economic consequences and political consequences, but there’ll be enormous consequences worldwide.”

– US President Joe Biden describes the ramifications should Vladimir Putin authorise a Russian invasion of the Ukraine.

The information contained is correct as at the date of the article.

Aristotle Capital Management, AXA Investment Managers, and Artemis Investment Managers are Fund Managers for St. James’s Place.
The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.

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