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Investment Commentary Q1 2022

Published 20/04/2022

In Brief

  • Q1 2022 saw falls in most asset classes, with the main exception being commodities and commodity producing regions.
  • Russia’s invasion of Ukraine was a key event within the quarter in terms of market impact, as the sanctions imposed in response raised the prices of oil, gas, metals and agricultural products given Russia’s importance as a commodity exporter
  • Inflation, and central bank tightening to try to tame it, were another major factor that led to market volatility and falling bond prices

Quarter Overview

2022 began with further concerns around rising inflation and nervousness around a build-up of Russian forces at the border of Ukraine which drove oil prices higher. Inflation continued to rise almost worldwide, and to levels not seen for 30 years in developed markets. To combat this, central banks began guiding towards much faster rate rises than markets had previously expected, which led to rising bond yields and falling bond prices as well as a sell-off in more highly priced equities in January.

February 2022 will sadly be remembered as the month that Russia invaded Ukraine. As well as the deeply troubling impact on human lives, markets also took fright leading to a sell-off in equities. Gas and oil prices spiked towards the end of the month given how big an energy exporter Russia is, after already having risen in response to rising tensions and low gas inventories. This has served to push global inflation expectations up and global growth expectations down.

March saw the world coming to terms with the atrocity of war in Ukraine, albeit heartened by the resilience of the people of Ukraine. There was a glimmer of optimism towards the end of the month as Russia seemed to signal that their ‘military operation’ was nearing an end. Markets rightly treated this with scepticism, but the month also saw investors begin to refocus on inflation and central bank tightening as the key risk to investments.

Overall, the first quarter saw generally poor market performance across most asset classes with the main exception of commodities and commodity exposed equities and regions. Commodities tend to benefit from higher inflation, but prices rose further because of shortages resulting from sanctions on commodity exporting Russia after their invasion of Ukraine. Emerging market bonds were the worst performing asset class, suffering both from rising yields and from the bonds of major constituent Russia falling due to sanctions. Continental European equities also fell heavily in the aftermath of the invasion given Europe’s dependence on Russian gas for its energy needs. Market volatility, as measured by the VIX index, rose almost 20% over the quarter. Developed market equities (as measured by the MSCI World Index including dividends) fell 2.4% in sterling terms over the quarter. The commodity heavy FTSE 100 returned 3% over the quarter including dividends. Emerging market equities (MSCI EM Index) fell just over 4% over Q1. Global bond yields rose steadily over the quarter leading to higher quality bonds (as measured by the Bloomberg Global Aggregate Index) falling 5%. Lower quality ‘high yield’ bonds also fell just over 5%. Oil was up 39% over Q1 whilst gold rose 5.9%.

Selected asset class returns - Q1 2022

Data source: Financial Express

Indices used (including interest & dividends): Defensive Investment Grade Bonds – GBP hedged Bloomberg Global Aggregate Index; Riskier Bonds (High Yield) – GBP hedged Bloomberg Global High Yield Index, Developed World Equities – MSCI World Index in GBP; Emerging Market Equities – MSCI Emerging Markets Index in GBP; FTSE 100 (UK Large Capitalisation Equities)

Diving into stylistic performance within indices, cheaper ‘value’ companies (which generally includes oil & gas companies) outperformed over the quarter, up just over 2%. Smaller companies fell slightly more than world equities, down almost 4% whilst ‘high price’ securities (often described as ‘growth’/’momentum’/’quality’ companies) underperformed over the quarter, down just over 7%.

Selected style returns - Q1 2022

Data source: Financial Express

Indices used (including interest & dividends): Developed World Equities – MSCI World Index in GBP; Growth Equities – MSCI The World Growth Index; Value Equities – MSCI World Value Index; Small Company Equities – MSCI World Small Cap Index

The pound had a weaker quarter overall. It fell 2.8% against the US dollar and 0.6% against the euro but was up 2.5% against the yen which itself weakened dramatically.


The PortfolioMetrix Core portfolios had a subdued quarter. Asset allocation was a slight headwind, due to a small overweight to emerging markets and Chinese domestic A Shares which performed poorly. Active fund performance also detracted over the quarter, mainly due to UK funds holding a higher weight to underperforming UK small and mid-sized companies during a period where large companies in the UK outperformed.

Sustainable World portfolios also had a weaker quarter, with their tilt towards underperforming quality/growth companies detracting over January. They had a better rest of the quarter, however, and continue to enjoy significant long-term structural drivers as the world shifts to focus more on environmental and social issues.


Moving in to the second quarter of 2022, the prevailing worry on global investor’s minds is again inflation and central bank tightening in response. The acute geopolitical risk of Russia’s invasion of Ukraine, and in particular worries over NATO being sucked into the conflict and dark threats from Russia over the use of nuclear weapons, has faded somewhat. However, sanctions on commodity exporter Russia are feeding into higher inflation and this is very much still having a big effect on economies and markets.

CPI Q1 2022

Source: Deloitte COVID-19 Economics Monitor, 22 March 2022

Western economies haven’t had to deal with serious inflation for decades, but its corrosive effects for everyone are starting to become all too apparent. As just one example, energy costs for consumers are increasing quite dramatically. Energy markets (in the form of the oil and natural gas that fuel power stations and cars, and heats homes) are global – so a disruption in Russian gas exports affects all countries, even those that don’t themselves import much Russian gas such as the UK.

Wholesale gas price Q1 2022

Source: J.P. Morgan Asset Management Guide to the Markets Q2 2022

And not only is inflation serious for individuals, but it can also hinder economic growth. Firstly, consumers that have to spend more on electricity, heating their homes and transport have less money left over to spend on the other goods and services that make up the economy. Secondly, to tame inflation, central banks need to tighten monetary policy by raising interest rates and stopping or reversing quantitative easing. Tightening directly slows economic growth by raising interest rates which makes borrowing more expensive for companies and individuals. Central banks are already tightening, with much more expected from here.

Policy rates Q1 2022

Source: J.P. Morgan Asset Management Guide to the Markets Q2 2022

Perhaps the biggest market worry at present is that central banks will be forced, by inflation, to raise rates so high (or simply raise too much by mistake) that this will choke-off growth completely in future causing a recession. This is indeed a risk, and growth expectations are coming down, but is by no means inevitable given economies are still projected to grow faster than they have historically as they recover from COVID lockdowns.

GPD growth forecasts Q1 2022

Source: J.P. Morgan Asset Management Guide to the Markets Q2 2022

Nevertheless, there are other risks out there that could precipitate market falls and possibly recessions.


The war in Ukraine continues, so the risk of an escalation remains – everything from Russia using chemical or tactical nuclear weapons within Ukraine to NATO somehow being dragged into the conflict. A key wildcard at present is whether China steps in to assist Russia more directly given their historically friendly ties. This would risk western sanctions on China which would likely be far more disruptive than those on Russia given China’s global heft. Russia was only about 1.7% of world GDP in 2020 according to the World Bank, whereas China was 17%.


COVID also isn’t quite done with us. Of course, a new variant is a risk to all, but whilst the effects of Omicron have been relatively benign for countries that struggled through previous variants, it is currently wreaking havoc in China. China has, up to now, successfully maintained a zero COVID policy but is struggling to do so with many more Omicron infections. Abandoning the policy would be difficult given China’s population hasn’t built up immunity from prior infections and their home-grown vaccines appear to be less protective, but at the same time the lockdowns it is imposing are negatively impacting growth and aren’t quite stamping out the virus.


Then there remain the usual political risks, the biggest of which is that Eurosceptic and NATO-sceptic Marine Le Pen beats favourite Emmanuel Macron in the second round of the French elections on 24 April. Such a victory would immensely damage the unity that Europe has shown in the face of Russian aggression, as well as complicate EU decision-making more widely.


Despite these risks we remain cautiously optimistic around our portfolios. Equities as a whole still have some upside given strong earnings expectations and do have the potential to outperform even current high levels of inflation.

Global earnings per share Q1 2022

Source: J.P. Morgan Asset Management Guide to the Markets Q2 2022

Valuations also look reasonable for equities in most regions, with the possible exception of the US.

Forward P2E ratios Q1 2022

Source: J.P. Morgan Asset Management Guide to the Markets Q2 2022

Cash and bonds are, however, much more problematic from an after-inflation returns perspective. They remain crucial for diversification and for controlling risk in portfolios, but we have been actively seeking out alternative asset classes that should be able to provide further diversification and withstand inflation better. At present we use high yield bonds, emerging market bonds, listed infrastructure and real estate for this, but we have some active research projects looking at other possibilities. Overall though we continue to favour diversification as a means to building portfolios that should flourish over the long-term but are robust to the uncertainties we face over the near-term.


The first quarter of 2022 saw dramatic tightening by a number of developed and emerging market central banks. The US Federal Reserve raised rates by 0.25%, stopped quantitative easing (stopped buying US bonds) and dramatically increased their guidance around future rate rises whilst the Bank of England tightened rates by 0.5% and began to reverse its quantitative easing. Almost the sole exception was the Chinese central bank, which loosened its policy slightly to mitigate the isolated lockdowns the country is still using to control COVID.

Monetary rates Q1 2022


GDP figures released in the first quarter were for Q4 2021 and were generally positive as economies continued to recover from COVID disruption. Inflation generally increased during the first quarter, in many cases to levels not seen for decades. Unemployment generally fell as economies continued their recovery from COVID.

GDP growth Q1 2022


Asset class performance Q1 comparison
Asset class performance Q1 comparison table

Note: The above returns are total returns, including dividends and interest payments. Asset classes with the “HDG” label are currency hedged to pounds sterling, which means that foreign currency movements are removed whilst those with the “£” label indicate that we are reporting returns to British holders which includes the effects of the foreign currency moves non-UK listed securities are exposed to.

Data source: Financial Express

Indices used: Bank of England SONIA, GBP hedged version of FTSE World Government Bond Index, GBP hedged version of FTSE WorldBIG Corporate Index, GBP hedged Bloomberg Global High Yield Index, GBP hedged version of FTSE Global Emerging Markets US Dollar Government Bond Index, MSCI North American Index, MSCI Europe ex-UK Index, FTSE All Share Index, MSCI Japan Index, MSCI Pacific ex-Japan Index, MSCI EM Index, FTSE Global Core Infrastructure 50/50 Index,  FTSE EPRA NAREIT Global Index and S&P Goldman Sachs Commodity Index


Indicies, commodities, currencies Q1 2022


  • FTSE 100 is an index of the 100 largest companies by market capitalisation listed on the London Stock Exchange. Crucially, whilst these companies are priced in sterling, the majority of their revenues comes from outside the UK making the FTSE 100 more a global, rather than domestic UK, index.
  • MSCI World Index is used to gauge global developed market equity performance. This is heavily influenced by US equity performance which, as the world’s biggest equity market, makes up more than half of the index. Not to be confused with the MSCI All Country World Index, which includes both developed equities and emerging market equities.
  • MSCI Emerging Market Index measures emerging market equity performance.
  • Bloomberg Global Aggregate Index represents global investment grade bond markets, mostly made up of government bonds.
  • Chicago Board Options Exchange Volatility Index (VIX) is a measure of implied volatility in the S&P 500 Index (how volatile market participants expect big US equities to be/how risky they view them to be). It is also known as the “fear index” – with higher numbers crudely representing “more fear” in markets and lower numbers crudely representing “more greed”.
  • Brent Crude oil prices are a key indicator of movements in the global oil market, the world’s most important commodity as it is such an important input into economic activity (in providing energy and as a raw material in production of materials such as plastics).

Data Source: PortfolioMetrix, Bloomberg

*Glossary of Financial Terms

  • Hedging back to sterling: The risk of currency fluctuations can be removed by “hedging” the foreign currency back to the pound. In this way, a UK investor holding a US government bond or bond fund would not experience changes to the pound to US dollar exchange rate and their holding would be a lot less volatile/risky.
  • High yield: High yield debt is rated below investment grade and is riskier. It has a higher yield to compensate for this additional risk.
  • Monetary Policy: The decisions central banks make to influence the supply of money in an economy, primarily the setting of base rates in the economy, but also through certain extraordinary measures such as quantitative easing.
  • Quantitative easing: Quantitative easing refers to expansionary efforts by central banks to help increase the supply of money in the economy (and help indirectly lift the economy). It involves the central bank purchasing financial assets, mainly government bonds.
  • Quantitative tightening: A mechanism for decreasing the supply of money in the economy to cool excess growth (above a stable level). It involves the central bank allowing purchased bonds to mature or in more extreme cases selling previously purchased financial assets.
  • Quarterly vs annualised growth rates: Some national statistical agencies prefer to quote country growth levels in a quarter as an actual quarterly rate (the estimate of growth over three months, x, sometimes referred to as “on quarter” growth) whilst others prefer to quote the growth over the quarter on an annualised basis (i.e. assume the growth over three months continued for a year, approximately 4x). Unless specified otherwise we quote only annualised rates using actual calculations rather than the simplified approximation of annual rate = 4 x quarterly rate.


This document is only for professional financial advisers, their clients, and their prospective clients. The information given here is for information purposes only and is not intended to constitute financial, legal, tax, investment, or other professional advice. It should not be relied upon as such and PortfolioMetrix cannot accept any liability for loss for doing so. Any forecasts, expected future returns or expected future volatilities are not guaranteed and should not be relied upon. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance is not a reliable indicator of future performance. Portfolio holdings and asset allocation can change at any time without notice. PortfolioMetrix Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. Full calculation methodology available on request.

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