Client Update - 18th March 2022

Not only have we had continued focus on the Ukraine this week, we have also had the US Federal Reserve and the Bank of England announce interest rate rises, with some interesting commentary to go with them.

According to the BBC, yesterday afternoon, President Vladimir Putin rang the Turkish President, Recep Tayyip Erdogan, and told him what Russia's precise demands were for a peace deal with Ukraine.

Chief among these demands is an acceptance by Ukraine that it should be neutral and should not apply to join NATO. Ukraine's President Volodymyr Zelensky has already conceded this. There are other demands such as Ukraine having to undergo a disarmament process to ensure it was not a threat to Russia and there would have to be protection for the Russian language in Ukraine.

Mr Putin said that it would need face-to-face negotiations between him and President Zelensky before agreement could be reached on these further points, but we do not yet know what these are. Mr Zelensky has already said he's prepared to meet the Russian president and negotiate with him one-to-one. These further talks may involve the status of Donbas, in eastern Ukraine, parts of which have already broken away from Ukraine and stressed their Russianness, and the status of Crimea. Should Russia demand that the Ukrainian government give up territory in eastern Ukraine, the success of the talks would be uncertain.

Whilst we await further updates on this, we had some encouraging news this week on UK GDP. In January the UK recorded growth of 0.8% month on month, firmly above market expectations of a 0.1% rise. The economy appeared to shake off Omicron concerns much sooner than expected.

Despite the positive surprise to growth these figures indicate, the outlook for growth is less buoyant given the impact of the Russia-Ukraine war. Under the assumption that gas and oil prices remain elevated over the course of 2022, we have seen downgrades in growth forecasts to 3.4% in 2022 (from 4%). Beyond the suffering and humanitarian crisis from Russia's invasion of Ukraine, the entire global economy will feel the effects of slower growth and faster inflation.

The Bank of England (BOE) has raised UK rates to 0.75% and commented that inflation could hit as high as 10% in 2022. The monetary policy committee voted 8-1 to increase rates – the first time the bank has raised rates at three consecutive meetings for more than 20 years. We expect that in the near term the BOE’s focus will remain on securing inflation expectations and that it will increase the Bank Rate, hiking into a weakening economy to ensure expectations remain anchored given the additional persistence of the inflation shock. We could therefore see rates reach 1.25% by June, particularly if the labour market remains as tight as we expect. How inflation expectations change throughout the year remains key.

Markets have had another volatile week, starting off poorly and then recovering well mid-week with some positive news from the Chinese state with regards to stabilising market weakness with more supportive measures. There is an unconscious temptation for investors to also be reactive to the news itself or the volatility it creates. Being overly reactive is not necessarily the best choice. Of course, there are some key changes that fund managers have been taking over the last month or so, however in times such as these it remains best to stay fully invested as far as possible when the markets are fluctuating as much in a day as they normally would in a month. We must remember that investment markets do not always respond in a predictable way to real time information. For now, we await further news on the crisis in Europe and we remain comfortable with our clients’ portfolios and the work going on behind the scenes to manage them. Do have a good weekend.