Weekly Market Overview | 22 January 2022

With the 2022 World Economic Forum having taken place last week, various recurring themes were cited by the plethora of speakers that were present for the virtual meeting. Key concerns were raised by bankers, economic policymakers and world leaders. Chief among those was Covid-19 in relation to the global economic recovery, the threat of rising inflation and higher interest rates in the global economy, as well as investments in green technology.

The continued rising interest rate fears caused by the breakdown in the global supply chain pushed global stocks to a significant decline this week. The S&P 500 index, as well as the Nasdaq composite index, were two of the major indices hit this week, with the former seeing its biggest decline in more than 14 months and the latter seeing its biggest weekly drop since the beginning of the pandemic. However, these aren’t the only casualties, as the continued global shortage of semiconductors weighs heavily on automotive and tech stocks.

The sheer demand for the semiconductors that power cars, electronics and electrical grids have continued to stoke inflation and could cause more factory shutdowns globally as the demand far outweighs the current supply, even with global chip makers approaching their maximum production capacity. Financial services shares also took a major hit as well with financial giants JPMorgan Chase and Goldman Sachs feeling the brunt of the decline.

In response to the current economic climate and the concerns that the rising trajectory of inflation might last longer than previously forecast, coupled with surging energy costs and signs that wage demands are rising, there is increasing speculation that the United States Federal Reserve, the European Central Bank, the Bank of England, as well as other global monetary policy bodies, will move more aggressively to curb this by tightening their monetary policy and raising their interest rates significantly more than historical rate hikes in recent times.

In terms of energy and decarbonization, the focus on oil growth has been minimal and as a result, the higher oil prices that we are currently seeing are consistent with a global push for investment in green energy as most companies are essentially strong-armed into embracing a carbon budget that limits investment in oil and gas development. The providers of capital are bullish on decarbonization but the global policymakers are lagging behind in terms of agreeing on a global framework to implement this, which is causing this period of volatility, uncertainty and historically high oil prices.

This is what has led to higher hurdle rates and the high cost of capital for expansion projects and this is prolonging the up-cycle that we are seeing in the global energy costs because it is creating a decrease in the supply, while the demand has not tapered off. As a result, on an international level, oil companies and businesses that are in the carbon energy sector have focused less on growth and more on the development of low-carbon offshoots of their businesses. This phenomenon is not just affecting investment portfolio’s that are heavy on oil and gas but sectors like shipping, steel, and cement are all seeing 40% less investment compared to recent history. All of these global sectors which are carbon-intensive are seeing significant pressure because of the policy uncertainty, which suggests higher prices for energy into the long-term future.

On a lighter note, the global cases of Covid-19 continue to surge largely due to the Omicron variant, but the decline in the severity of illness and decreased hospitalisations have been the precursor to most countries beginning to relax their restrictions on movement and economic activity. This has been seen in most European countries as the U.K and France lead the way in getting back to some semblance of normality. This has been the catalyst for some of the exuberance we are seeing from investors as they position their portfolios for the global economy to recover in the wake of the delays caused by the new variant and supply chain bottlenecks.