Last month, the Russian invasion of Ukraine remained a key concern for investors, although the initial market reaction to the conflict subsided. Global stock markets rebounded by nearly 5% after a slow start to March, led by a resurgence in US equities.
The oil price, which initially surged at the beginning of the month, eventually settled closer to its starting point than its peak. Central banks took action to combat persistently high inflation, with the Federal Reserve raising rates for the first time since 2018 and the Bank of England delivering its third rate increase in four months.
US indices finished the month with positive returns of over 5% in GBP terms, showing resilience and recovering some of the losses from the negative first quarter. UK large-cap equities experienced modest gains and displayed less volatility compared to their US and European counterparts, partially cushioned by significant weightings in oil and gas stocks.
European stock markets fared worse than the US markets, but still ended the month relatively unchanged in GBP terms. The decline in the value of the pound provided a boost to GBP-denominated returns on the Continent and across the Atlantic.
Inflation remained a focal point, with the US consumer price index reaching a 40-year high of 7.9%, and the eurozone equivalent hitting a record high of 7.5%. The UK inflation rate of 6.2% was slightly lower but significantly higher than expected, marking a 30-year high and well above the Bank of England's 2% target. The labour market remained tight in both the US and the UK, with unemployment rates below 4%, the lowest levels since the onset of the pandemic.
Bond markets experienced significant sell-offs, leading to higher yields. The US 10-year Treasury yield reached its highest level in almost three years, while the UK 10-year Gilt yield rose to levels not seen since the beginning of 2018. Short-term yields saw even larger increases as markets priced in an aggressive hiking cycle.
Concerns arose as certain yield curves inverted, with the 2-year Treasury yields surpassing the 10-year yields for the first time since 2019. While inversions have historically been associated with impending recessions, there are mitigating factors suggesting a different outcome this time. However, the psychological impact of an inversion could influence market sentiment and potentially become a self-fulfilling prophecy.
The outlook for corporate profits in 2022 became more modest due to the combination of slowing growth, rising input costs, and higher interest rates. Initial estimates of 10% growth in earnings per share were downgraded, with a growth rate closer to 3% now expected. Geopolitical risks were identified as the top concern for investors, and earnings guidance may be adjusted lower as Q1 results are announced.
Energy companies performed well in Q1 and continue to show relative attractiveness, as they typically perform well after the first interest rate hike. However, other companies are facing challenges related to widening commodity supply disruptions and sustained cost input inflation. Margins may be squeezed as inventories are rebuilt and sales growth becomes more challenging, while the resurgence of COVID infections adds disruptions to an already tight labour market.
Despite these challenges, there is still belief in the investment cycle having further room to run, with modest single-digit corporate profit growth expected, assuming the situation in Ukraine does not escalate. Forward valuations have eased since the beginning of the year, and outside the US, they are below their 10-year averages. With bond yields continuing to normalize, there remains a modestly optimistic outlook for equities.