Week ending 7th January 2022.

Global equity markets rang in the New Year with the release of the minutes from the Fed monetary policy meeting held on 15 December 2021 – which were much more hawkish than we expected.

The minutes stated that in general, given the policymakers individual outlooks, “it may become warranted to increase” US interest rates “sooner or at a faster pace” than policymakers had earlier forecast – and as such the accompanying ‘dot-plot’, which is designed to show each policymaker’s interest rate forecast, is now projecting that there will be three interest rate increases in 2022!

As a result, financial markets immediately started to expect, and therefore price-in that the first of these three increases will occur in March.

This caused a sharp sell-off in technology companies, as higher interest rates effectively reduces today’s value of future profits (in other words, the ‘NPV’, net present value) – and the technology sector includes many companies that are currently unprofitable but have high valuations based on their expected future profitability.

Unsurprisingly, given the heavy weighting in technology companies, the US equity markets (and in particular the Nasdaq), ended the week lower, while European equity markets (and the FTSE-100 in particular), were fairly well protected from this sell-off given their much lower technology exposure.  For example, technology companies account for just 1.09% of the FTSE-100, compared to 29.6% for the S&P 500 – and this clearly highlights the benefits of our globally diversified portfolios: while your portfolio hasn’t been immune from this week’s technology sell-off, its diversification has helped to reduced risk and volatility.

Whilst we fully appreciate that any short-term volatility can be unsettling, it is important that you stay diversified and maintain a long-term perspective as we believe that this is one of the keys to positive long-term investment returns.

Looking ahead to this week coming, we have US & Chinese CPI inflation; US retail sales; UK GDP for November; UK & Eurozone industrial production; and the University of Michigan Consumer Sentiment index.

The Investment Management Team