As the war in Ukraine and resulting humanitarian crisis continues , the International Monetary Fund (IMF) has warned of the significant negative repercussions it will have to global economic growth. This could mean that equity markets will continue to face a tougher environment in coming months.
In its April 2022 World Economic Outlook, the IMF wrote: “The war in Ukraine has triggered a costly humanitarian crisis that demands a peaceful resolution. At the same time, economic damage from the conflict will contribute to a significant slowdown in global growth in 2022 and add to inflation. Fuel and food prices have increased rapidly, hitting vulnerable populations in low-income countries hardest.”
As a result, it projected global growth would slow from an estimated 6.1% in 2021 to 3.6% in 2022 and 2023. This is 0.8 and 0.2 percentage points lower for 2022 and 2023 than the IMF projected in January, before the war.
Data released on Thursday revealed that the US economy shrank by -1.4% in Q1 2022, upending expectations of modest growth . This was largely the result of falling inventory investment and a record trade deficit. Consumer spending and business investment remain steady for the time being.
US equity markets also weakened, as mixed company results coupled with the surprise first quarter economic contraction weighed on investor sentiment. The S&P 500 declined by -3.3%, with index heavyweights Amazon and Alphabet both posting weak earnings. Even Apple, which had reported record quarterly revenues, struggled to maintain any real positive momentum due to investor concerns regarding its cautious outlook.
In the coming week, the US Federal Reserve will host its latest monetary policy meeting, with expectations pointing towards another interest rate hike amid surging inflation.
In the UK, the Bank of England’s Monetary Policy Committee are also meeting and, like their American counterparts, are expected to raise rates once again.
Turning to the eurozone , last week the region reported quarter-on-quarter Q1 GDP growth of 0.2%. The week also saw Macron win a second term as President of France, beating right wing candidate Le Pen. However, these were not enough to give all commentators confidence about the regions near future performance.
Franziska Palmas, Markets Economist at Capital Economics, said: “The latest eurozone economic data reinforces our view that the region is headed for a year of stagflation; against this backdrop we expect that eurozone assets and the euro will struggle over the remainder of this year.”
This sentiment was reflected in regional equity markets, as the MSCI Europe ex. UK index declined by -0.8%.
In China, strict lockdowns have helped lead to a sharp downturn in manufacturing activity, and the Shanghai SE Composite Index fell almost 1.3% last week.
However, Martin Hennecke, SJP Head of Asia Investment Advisory and Communications, said that as investors reach the point of maximum pessimism on the country, there could actually be an opportunity there.
Speaking to Bloomberg, he said: “They [China] are rolling out massive tax cuts and massive infrastructure packages, both of which are larger than what we have seen in the US recently. This coupled with very low valuations and a government focussed on stability rather than tightening and crackdowns like last year, means the opportunities are very good, so long as one holds it as part of a diversified portfolio, looks at the medium to long term and can tolerate some volatility.”
What is more, while several economies look at risk of a potential recession, this does not always mean equity markets fall. Adrian Frost from Artemis notes: “The FTSE was stable through 1990 and 1991 when the UK was receding. Most would argue that the financial markets’ collapse in 2008 caused that recession – rather than the other way around. The recession in 2020 caused by Covid saw markets finish the year strongly.
“We can’t and don’t give financial advice. Yet it’s evident to us that to desert equities is to take quite a risk with (rapidly rising) inflation. Elements of that will prove transitory, but not all. Even at its current rate (6%), inflation will halve the value of cash in just 12 years. Yields on equities may be below inflation, but they are often better than those on bonds – and certainly better than the return on cash.”
In challenging times, active management can help with returns for investors, as they are able to make selective investments in companies that are well placed to perform in today’s environment.
The past couple of years have reminded us of how precarious our finances can be when things change. More recently, the war in Ukraine has contributed to a spike in fuel, food and other prices that has sent UK inflation to a 30-year high.
For many households, rainy-day savings will likely be shrinking or even vanishing due in order to cover living costs.
It can take years to build up your emergency funds, and a matter of days or weeks to deplete them.
“The recommended amount of savings for an emergency fund is three to six months’ expenditure, and that can act as a buffer between jobs and to see you through higher living costs,” says Harriet Shepherd, who runs SJP’s Workplace Financial Education programme.
It only takes one unfortunate event to jeopardise your income: an illness or accident that prevents you from being able to work, for example.
This is why protection insurance policies, such as income protection and critical illness insurance, are so invaluable.
Income protection insurance helps cover outgoings such as mortgage repayments, rent, bills and other household essentials in the event of you being unable to work because of illness or an accident. It typically pays out between 50% and 65% of your income after a pre-agreed deferral period (usually three to six months) has passed, and most policies will do so for as long as needed.
Meanwhile, critical illness insurance pays out a lump sum on the diagnosis of certain specified critical illnesses or medical conditions.
Yet almost eight in ten have no income protection insurance in place, while 75% have no critical illness cover, according to the most recent Scottish Widows UK Household Finance Index.1
The reality is that we’re often more likely to take out insurance on material goods, such as mobile phones and household contents, than we are to protect against the income that pays for those products.
“Protecting yourself, your standard of living, and your health is far more valuable than protecting your material possessions. The impact of losing an income is so much greater,” Harriet points out. “If you’re the main household earner, it can have a huge impact on yourself and your family if you aren’t able to work.
“The question isn’t whether to get protection insurance, but whether you can afford to live without it in the event of not being able to work. This is especially the case if you’re self-employed and don’t have any of the cover or benefits that an employer might provide.”
1 Scottish Widows UK Household Finance Index, Scottish Widows, April 2022 (Based on a survey sample size of 4,500).
The below is on the basis that any tax relief over the basic rate is claimed via your annual tax return.
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Artemis is a fund manager for St. James’s Place.
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