MARKET UPDATE FROM TATTON INVESTMENT MANAGEMENT
After a disappointing January for investors, February made a promising start, only to revert to the same wild trading pattern. Nevertheless, what unnerved markets at the start of February followed the same playbook as the market turbulence in January: central banks choosing to no longer ignore inflation pressures and markets reckoning with the idea that the growth slowdown is slowly morphing into a growth slump.
On top of this, the potential for conflict on Europe’s doorstep only added to these concerns. Tensions between Ukraine and Russia created fears that both consumers and businesses could be hit with higher costs in the form of higher energy prices – forcing individuals and families to potentially balance heating homes or keeping the lights on with other areas they can cut back on. This obviously links back into the fears above about the potential for slowing economic growth. It may not be well understood, but Russia is an important player in global energy markets, with an estimated 17% market share of the supply of natural gas and 12% for oil.
Russia’s next move could therefore prove costly in many ways, so we hope that coordinated international pressure forces cooler heads to prevail, but the impacts on inflation are still being felt and central banks appear to be changing their tune in response.
Clearly, investors are concerned central banks are pivoting towards monetary tightening exactly at the point when the economy is at risk of slowing further - sliding from a slowdown in growth that started after last year’s activity bounce-back into a more serious growth shock. Should the central banks stick to their guns if growth turns negative this would clearly be seen as constituting a central bank error – historically the most common reason for economic recession. Market nervousness is therefore understandable, given the economic outlook has become far hazier than it was a year ago as the cycle has gone from ‘early’ to a ‘mid-cycle’ phase. Moreover, investors have no experience with post-global-pandemic recoveries to ground them, which only increases the level of uncertainty and insecurity.
Central bankers recall the wage-price-inflation spiral dynamics of the 1970s and are therefore doubly alert to the potential dangers we are now facing. However, warnings from history do not apply to the average consumer, and we no longer have widespread collective wage bargaining structures that encourage blanket wage hikes. Here at Tatton, while we cannot be entirely certain, we expect that the loud noises from central banks – together with the dismay over the coming price shock or cost-of-living-crisis – will see consumers spend more carefully and resign from their jobs in pursuit of higher pay.
We remain optimistic for portfolio investors for 2022 overall, although we admit that the economic outlook for the first quarter of the year is no longer looking positive. The shock to disposable consumer incomes from energy price rises is going to have a knock-on effect on corporate earnings, which may slow companies’ willingness to invest and spend. Interestingly, this dynamic makes aggressive central bank tightening action much less likely, as the job of curtailing demand to dampen demand-driven inflation pressure is taken out of their hands before they are forced to act.
Spring still feels a long way away, and the next few weeks may continue to be both unnerving and somewhat unstable in capital markets. For now, all signs from the global economy point towards a blip, rather than a cycle-ending downturn. We have been in these situations before, and capital markets have tended to ‘look-through’ such periods when there were enough signs that the slowdown would ultimately prove temporary.
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