18 February, 2022

Weekly Update - Russia-Ukraine, inflation and rate hikes worry markets

Investors, wary of any bad news, have been unable to maintain positive momentum in equity markets across the globe as geopolitical risks dominate headlines. Stocks slumped over the course of the week, interrupted only by a brief respite on Tuesday, as traders weighed heightened concern over geopolitical risks centered around Russia and Ukraine added to worries about persistent inflation and the outlook for central bank policy.

 

Canadian consumer price inflation accelerated to a new three-decade high in January, adding to pressure on the Bank of Canada to start raising interest rates as early as March 2. Annual inflation was 5.1% last month, up from 4.8% in December, Statistics Canada reported. Economists were anticipating inflation would be unchanged in January.

 

Inflation has now exceeded the central bank’s 1-3% control range for 10 straight months as global supply chain bottlenecks and labour shortages push up prices. Since Canada introduced inflation targeting in the early 1990s, the inflation rate has averaged about 1.8%.

 

Similarly, prices paid to U.S. producers jumped in January by more than forecast, pointing to persistent inflationary pressures as companies contend with supply-chain and labour constraints.

 

Both the Canadian and American figures, which reflected broad increases across multiple categories, further reinforce the viewpoint that central banks will begin raising interest rates next month amid mounting inflation throughout the economy. Transportation bottlenecks, robust demand and labor constraints experienced through 2021 have carried over into this year and risk keeping price pressures well-elevated.

 

Markets are pricing in as many as seven increases in borrowing costs over the next 12 months.

 

As markets continue to react and adjust to changing conditions, a continued focus on your long-term goals remains the best course of action. Investing through a well-diversified portfolio has historically provided the best experience through a combination of goals-based returns and reduced volatility over time.

 

  • Short-Term View: Markets were driven by “bad news” headlines this week about Russia and Ukraine, inflation and rising interest rates.
  • Longer-Term Thinking: Markets are cyclical over shorter periods. Growth in equities over time is in alignment with long-term historical trends. Maintaining a balanced and diversified portfolio is key to your long-term investment success.
  • Logic Over Emotion: Perspective is key. Focus on long-term goals and timeframes.

Our Experts Say...

 

“We remain constructive on investing into credit risk at this juncture, not all risks are built the same. Leveraged loans, while an appropriately sized portion in Counsel Fixed Income, still represent a higher risk proposition that do not warrant an oversized position given the current investment objectives of the average fixed income investor.”

 

Vincent Chan,

Senior Portfolio Analyst

IPC Portfolio Services

 

 

 

 

Over the past 10 years, markets are positive. Perspective is key. Markets do react to short-term increases in volatility – see the grey lines below – but the long-term trend is upward in the blue and red lines.

 

 

Source: Morningstar Direct. Growth of $100,000 shown. Total returns from Feb. 10, 2012 to Feb. 17, 2022 in local currency. Volatility is illustrated by the rolling 5-day minimum and maximum percentage change for each of the indices shown.