April 2022 Market Commentary

April has come and gone, and the indices have reflected investor sentiment, having priced in expectations of weakening economic growth in the world’s largest economies. Only the FTSE100 has escaped the downside that the other indices experienced. We’ve seen the indices react poorly this month, and some of the questions that may come up are why? Here are our thoughts on the contributors:

• Economic Forecasts - Markets have priced in weakened economic growth, with major economic headwinds. US stocks have been pressured, only held afloat by a relatively robust earnings season, from firms such as Apple. Weak guidance warning about continuing supply chain problems, headwinds including Federal Reserve monetary tightening, rising rates, inflation, China’s zero-Covid policy, and the war in Ukraine have made economists less than optimistic about GDP growth. The US economy contracted in Q1 2022, taking economists by surprise, with GDP dropping 1.4% year-on-year, the first time the US economy contracted since mid-2020. GDP in the Eurozone grew 0.2%. Both economies are experiencing slowing economic growth, in an inflationary environment, a sign of what is to come in the global economy. Investor mood is less positive and we feel that the fears of inflation with stagnant economic growth have pressured investors to flee for ‘safer’ assets, such as the traditionally safer FTSE-100 and commodities such as gold.

• Russia / Ukraine - With the Russia Ukraine war continuing, Putin has just taken a further step and halted natural gas exports to Poland and Bulgaria. Those two countries source roughly 45 and 80% of their natural gas import from Russia, respectively. However, both countries aren’t expecting a shortage any time soon as demand has dropped amidst warmer temperatures, while Poland’s gas storage remains high. Attention has now turned to the other two large Russian gas importers, Germany and Italy, although it’s doubtful that Russia will halt supply to them as it’ll damage their economy even further. Energy prices in the Eurozone rose 38% YoY, while food prices continue to increase, with unprocessed food prices rising by 9.2% YoY. Economists and policymakers of the large EU economies (Germany, France, Spain, and Italy) are expecting a degree of stagflation, as high energy prices hit households and businesses. We thus forecast a near-term slowdown in Eurozone real GDP growth.

Our thoughts With a world of rising rates, the Federal Reserve and the European Central Bank (ECB) face a number of problems. Many countries in the Euro have issues with funding their debt, while rate hikes in the US are likely to cut asset prices in many speculative sectors. This is because if a stock price is the risk adjusted value of discounted future cash flows, a higher risk free rate necessitates greater company fundamentals or a lowering of asset prices simply to justify the same price. The US treasury market has currently priced in eight hate hikes However, risings rates brings opportunities for a few sectors. Since banks take loans at short term rates, and give them out at longer (and higher ones), we’re bullish on financials. Recent data supports this. However, we also see tightening financial conditions for US consumers. In data recently released by the Chicago Fed we can see the impact of inflation, uncertainty, and rising short term rates. This means that consumers are less able to spend and is a near term headwind for many stocks. What we’re bearish on is consumer discretionary, non durables and 2nd order manufacturing. An increase indicated worsening conditions for US consumers. Visible in the large spike is the effect of COVID-19. Historical data indicates financials outperform, while consumer discretionary suffers under inflationary conditions A lot of consumer discretionary stocks seem very expensive. At Belvedere we’re cautiously observing them. We expect short term downtrends, exacerbated by inflation but we’re long term optimistic. Final Word Investing in the short term is a game of chance, volatility, and uncertainty. Time in the market, however, beats timing the market and at Belvedere, we’re long term greedy. Although we expect near term drawdowns, we’re well positioned for anything the market throws at us. The best days in the market often follow the worst days. Ernest, Taiga & Crystal Belvedere Wealth Management

*Disclaimer:

The commentary you find on this page is for information only; it is not intended as research or a recommendation suitable to your individual circumstance. Please seek financial advice from a professional before acting on investment decisions.

As is the very nature of investing, there are inherent risks, and the value of your investments will both rise and fall over time. Please do not assume that past performance will repeat itself and you must be comfortable in the knowledge that you may receive less than you originally invested.