A difficult first quarter for markets due to the outlook for higher interest rates to combat persistent inflationary pressures was exacerbated by the unexpected decision of Vladimir Putin to launch an invasion of Ukraine. A spike in energy and commodity prices, including agricultural products of which Ukraine and Russia are major exporters, the prospect of an escalation of the conflict and disruption to the global financial system unnerved markets. The effective application of sanctions and the relatively low significance of Russia in the global economy together with a struggle to achieve its military objectives has seen developed equity markets recover to pre-war levels although remaining in negative territory year to date. Emerging market equities generally saw further losses although higher commodity prices boosted Latin America. UK equities have continued to outperform other developed markets. The US Federal Reserve Bank increased interest rates for the first time since 2018 resulting in a decline in bond prices and the US Dollar strengthened against the Pound and Euro. The outbreak of Omicron in China during March weighed heavily on Chinese markets, making it one of the worst performing equity markets again this year.

Inflation continued to increase across developed markets and is expected to remain elevated over the coming quarters. It accelerated to 6.2% in the UK, 5.9% in the Euro area, and to a 40 year high of 7.9% in the US. While acknowledging the uncertainties relating to the Russia-Ukraine conflict and its economic implications, central banks have suggested that their focus is on addressing these heightened levels of inflation unless the growth outlook deteriorates significantly.

The Bank of England raised base rates from 0.50% to 0.75% in March and the US Federal Reserve Bank raised its target rate by 0.25% with a further six hikes expected this year. The European Central Bank confirmed that its pandemic emergency purchase programme will conclude in June with a possible interest rate hike later this year. Monetary policy tightening was also pursued by some emerging market central banks including Brazil, Taiwan and Korea. In contrast, the Bank of Japan kept interest rates on hold, emphasising concerns regarding the impact of the Russia-Ukraine crisis on growth rather than inflation, which in Japan remains low at around 1%.

The UK economy began the year with strong momentum, but it is likely to slow due to rising interest rates, energy prices and taxes. Despite economic concerns, the FTSE 100 Index has been one of the better performing equity markets this year due to its high exposure to commodity and financial stocks that benefit from higher interest rates, and almost no exposure to technology stocks which have come under pressure this year.

The consequences of the Russia-Ukraine conflict remain a risk for Europe in particular which is highly vulnerable to rising energy prices as it is the largest importer of Russian oil and natural gas, notably Germany. Consumer confidence moved sharply lower in March. Although reducing dependency on Russia requires a long term strategy, the European Commission announced plans to reduce imports of gas from Russia by the end of the year.

In the US, consumer sentiment deteriorated and the shift to higher interest rates hurt equities, particularly growth companies. With most of the expected interest rate hikes now priced in, this should no longer be a key risk for markets. The war in Ukraine has of course contributed to the uncertainty surrounding the global outlook, but the US should remain more resilient given its energy independence and lower share of commodity consumption in GDP. Strong household and corporate balance sheets should translate into above-trend growth this year.

China experienced a sharp rise in Omicron cases in March and the subsequent lockdowns and manufacturing plant shutdowns impacted markets and exacerbated global supply constraints. Towards the end of March, confidence was regained as economic stimulus measures were announced, along with an improvement in credit growth and the confirmation of a 5.5% growth target for 2022.

Severe economic and financial sanctions imposed on Russia by most developed nations will most likely cause significant damage to the Russian economy. Europe has avoided placing sanctions on Russia due to its dependence on the region for its natural gas.

The outcome of the Russia-Ukraine conflict is unpredictable with Vladimir Putin’s seeming expectation of a rapid capitulation from Ukrainian and a divided response from Europe and the US proving inaccurate. Any escalation and a widening of the conflict would increase the risk of higher energy and commodity prices, persistently elevated inflation and global growth prospects. Geopolitical crises have often had a sharp but relatively short-term impact on markets and can also accelerate longer term trends. This is evident in the response to the current energy crisis which has encouraged many governments to accelerate their energy transition and security plans.


Market Performance


2022 Year to Date
FTSE All-Share +0.49%
FTSE World ex-UK -2.22%
FTSE Actuaries UK Conventional Gilts All Stocks -7.17%
FTSE Actuaries UK Index-Linked All Stocks -5.50%


Total returns in GBP to 31/03/2022



Key Rates
Bank of England Base Rate 0.75%
Inflation (Retail Price Index/Consumer Price Index)* 8.20%/6.20%


* February 2022

Source of data: FE Analytics, www.bankofengland.co.uk, www.ons.gov.uk

The content contained in this article represents the opinions of MacIntosh & James Partners Ltd. The commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.