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In January, investors started the year by fearing central bankers were behind the curve, inflation was starting to become embedded and therefore interest rates needed to move higher and quickly. This meant global bond markets became under pressure and there was a subsequent knock-on negative impact to more growth and technology orientated companies. This was particularly pronounced in the FTSE 250 and US equity markets which are more biased to these areas. The market was reeling from the prospect of higher interest rates when Russia, somewhat unexpectedly, proceeded to invade Ukraine. As is the case with events like this, stock markets shifted lower whilst perceived safe haven assets moved into the ascendancy.

Of the ten main global indices, only the FTSE 100 has provided positive returns in the first quarter of 2022, mainly due to the heavy weighting of the index towards oil and mining companies who have benefited from soaring commodity prices. Following interest rate guidance from the Federal Reserve and hopes that a resolution to the Ukraine conflict could be found, the other major indices staged a partial recovery later in the quarter having reached a low point in early March.

Looking forward, the Russia/Ukraine conflict will continue to shape investor sentiment but also future government policy. The global economy is reliant upon commodities, especially sourced from politically vulnerable areas. This was a known risk and the conflict has only brought this to the fore. One of the many impacts from the war are higher Oil and Natural Gas price which have only added to the already significant inflationary impact being felt by the consumer.

The cost of living has certainly been a topic that is front and centre at the moment and is something we have been discussing with the companies and fund managers that we invest in. It is important to remember though that we are going through this with the consumer in good health because of the

savings built up during Covid and asset (house) prices at record highs. In the Office for Budget Responsibility’s (OBR) spring economic and fiscal forecast it will still expect the UK economy to grow by 3.8%, which is nearly double the trend growth we have seen over previous decades. However, this has been marked down from the 6% previously forecasted.

One question we have been asked a lot in the first quarter is “How much further can stock markets fall?” and more recently “Have we seen the low?”. The honest answer is that nobody knows. If tensions were to escalate then stock markets could see further falls. That being said, a significant amount of bad news has been priced in this year due to the forward looking nature of global markets. It can often feel the darkest just before dawn and markets can bounce strongly during periods like this. For example, 23rd March 2020 was the bottom on stock markets during Covid, which was also the day that Boris Johnson said the UK was going into a national lockdown.

In 2020, markets had moved in anticipation of the lockdown event, the announcement gave certainty and markets bounced. Our base case view at this stage is that a diplomatic solution will eventually be found and the situation will not escalate to all-out war and/or a nuclear event. However, even if a diplomatic resolution is found, the implications of this conflict are likely to be felt for years to come which can present both hurdles but also opportunities

In summary, we hope that the sad events in Ukraine are resolved quickly and an end is drawn to this humanitarian tragedy. From an investment perspective this conflict has added volatility in all asset classes and with cash deposits under pressure from inflation too, it has been a unique situation. Experience suggests that such conditions do not last long and indeed investment opportunities present themselves. Staying invested in quality companies that will rebound as sentiment improves is key.

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