04 April 2022
Since the start of the tragic battle in Ukraine, investors have been trying to decipher what it might mean for financial markets. Each geopolitical conflict is different, and history may be a less than perfect guide when it comes to assessing the possible maximum drawdown or time to recovery.
In the reaction of markets to such tensions, one thing has been constant: the impact of attacks and other military conflicts does not tend to last long on markets. This intuitively makes sense, because what ultimately dictates the direction of markets is the shape of the global economy and corporate profits. With this in mind, investors shouldn’t fear conflicts but rather their consequences, and whether they lead to a recession. In the case of Ukraine, this seems unlikely unless a supply-driven oil shock materialises
In our Outlook 2022, we suggested that investors might look beyond traditional asset classes to maximise returns and limit volatility in the year ahead. As yields rose and stocks struggled, a typical portfolio, consisting of 60% invested in equities and 40% in fixed income, has experienced a 10% drawdown in the first three months of the year. This is the second worst start to a year since 2012, the worst occurring when the COVID-19 pandemic hit. While a recovery is possible, we continue to expect more muted returns in coming months, requiring investors to expand their investment universe to make up for the shortfall.
Chinese authorities attempted to calm markets in March by striking a more reassuring tone. Whether it’s around the regulatory crackdown, the downside risks to growth posed by a zero-COVID policy, or the issues surrounding the dual listing of some companies in the US, Beijing has promised it would “support markets”. The result was immediate, with Chinese equity markets experiencing their best trading session in years in the day following the announcement.
Yet, a lot more will likely be required before investors’ confidence is restored and this year’s pullback is erased. As such, we remain patient but see Chinese assets as a possible positive surprise in the second half of this year.
On 10 April (first round) and 24 April (second round) the French will vote to elect their president. Until a few years ago, local presidential elections were a source of uncertainty for investors, as some high-profile candidates campaigned around the idea of limiting European integration or even removing the country from the EU (“Frexit”).
This time around, though, the election is seen by many as a non-event. First, incumbent Emmanuel Macron is credited with a significant lead in polls in both the first and the second rounds, and second, most leading candidates have toned down their anti-European rhetoric. While we don’t see any significant medium-term risk, polls have been wrong before and the lack of uncertainty is, in itself, a concern.
In March, Barclays Investment Bank updated its flagship publication 2030 Thematic Roadmap: 150 Trends. The third edition of this report outlines 150 far-reaching themes likely to dominate the investment landscape over the next decade. Organised over six main paradigms: Technology and Innovation, Consumer, Food and Retail, Industrials, Manufacturing and Transportation, Healthcare and Modern Science, Energy and Environment, and Society and Culture, this report is a must-read for anyone interested in thematic investing.
A surge in the price of oil, as well as elevated inflation levels, are making many economists reassess their global growth forecasts. Changes to both can also very easily move financial markets. This month’s articles aim to provide some much-needed context and clarity – at a time when volatility and uncertainty weigh on investors’ minds.
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