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In this month’s investor update, Annabelle Williams, personal finance specialist at Nutmeg, speaks with our chief investment officer, James McManus, about turbulent markets in the first weeks of 2022 and what this has meant for Nutmeg portfolios.

It’s been a volatile start to 2022 for both equity and bond markets. What’s been the cause of this unease among investors?

That’s right, after a relatively smooth journey for investors in 2021, January brought more challenging market conditions. At its heart, this stems from worries about rising inflation and how it might be contained by central banks. In the first week of January, the US Federal Reserve published minutes from its December meeting which showed unanimous agreement on the need to tighten monetary policy by raising interest rates “sooner or at a faster pace” than had earlier been forecast. In the eyes of some investors, the central bank is now playing catch-up with inflation it only recently termed “transitory” and with a labour market that is close to levels of maximum employment.

This follows the Bank of England’s surprise move to raise interest rates in December and commentary from other central banks on the need to normalise monetary policy as we move into a new phase of the post-pandemic recovery, and ensure that we don’t allow inflationary pressures to become too deeply embedded.

So, how would this fear around rising inflation influence investor behaviour?

Well, when investors rapidly re-assess their positioning on new information, we tend to experience market volatility. January has seen investors scrambling to place bets on the potential speed of interest rate rises, and at the same time rotating away from more interest-rate-sensitive growth-focused stocks, towards those that offer value characteristics, i.e. those trading at lower prices than a company’s performance may otherwise indicate.

That means the most exuberant and speculative parts of financial markets are being worst hit – cryptocurrencies and high-growth technology stocks among them. And of course, a changing interest rate environment can also trigger investors to re-think sector and country exposures, a re-assessment of the potential winners and losers if interest rates rise more rapidly than previously expected. This re-shuffling of the decks is a common market phenomenon, and while uncomfortable for investors short term, it can also present opportunities as well as risks.

How did the Nutmeg fully managed portfolios perform during the month of January?

Fully Managed Nutmeg portfolios delivered negative returns in January, falling around -2.1% in the lowest-risk levels, -4.2% in medium-risk portfolios and around -5% in the highest-risk levels. Socially Responsible portfolios meanwhile delivered negative returns of -2.6% in the lowest-risk levels, -5.4% in medium-risk portfolios and around -6.6% in the highest-risk levels.

Those losses come in the context of UK government bonds having their fifth-worst monthly performance since 1999, with losses of -3.8%, while global stock markets also fell, led by the US where the S&P 500 declined just under -5.2% in local currency terms.

Have you made any changes to the Nutmeg portfolios in January?

We have rebalanced our equity exposure, putting more money to work in socially responsible US equities from our cash holdings in the final week of January. When markets are volatile, this can be a good time to pick out new opportunities to invest, and we continue to favour both US equities and those with greater socially responsible characteristics in our portfolio allocations.

We’ve just celebrated the start of the Lunar New Year, while the Beijing Winter Olympics are now in full swing. China, and emerging markets generally, performed poorly for investors in 2021. What’s your view on China in 2022 and beyond?

For long-term investors, the appeal of the long-term Chinese economic growth story remains very enticing, as both a manufacturing powerhouse and with a burgeoning middle-class population ready to transform the economy through consumption. The Chinese economy is the world’s second largest and a critical growth engine for both emerging markets and the global economy, but it’s a very different place today than it was in the mid-2000s when it was at the front of the queue to benefit from the rapid globalisation and export-driven growth that was a boon to emerging market outperformance.

In diversified multi-asset portfolios, China will always have its place – we access it via broader emerging markets exposure. But we think there is continued room for caution in the post pandemic era – questions hang over the future of China’s relationship with the US, whether the Chinese state’s control of capital markets has damaged investors medium-term confidence in Chinese assets, and also whether China’s zero tolerance approach to Covid cases will continue to impair economic activity levels.

Add to this a potentially stronger US dollar as the US Federal Reserve begins to raise interest rates and it’s hard to avoid the conclusion that despite last year’s market losses and a still rosy global trade environment, there are still considerable headwinds to contend with.

We’ve written a blog exploring these issues in more detail, which you can read here. More context around volatility in 2022 and what this might mean for investors is also available here.

James’ latest thoughts around the reasons for a volatile January can also be read here.

The Nutmeg investor update is available as a podcast, listen to this month’s update below.

About this update: This update was filmed on 7 February 2022. All figures, unless otherwise stated, relate to the month of January 2022. Source: MacroBond, Nutmeg and Bloomberg.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance.