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War’s consequences spur inflation to new highs

April 20, 2022
clock 9 MIN READ

Kevin Barr, Head of SEI's Investment Management Unit, provides an overview of the global financial markets and our perspective on them.

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- Hi, I'm Kevin Barr, head of SEI's Investment Management Unit. Over the next few minutes, I'll provide an overview of the global financial markets and our perspective on them.

Investors faced difficult conditions on multiple fronts during the first quarter of 2022.

Global equities declined, delivering their poorest quarterly performance since early 2020. Global bonds fared worse, tumbling by the most since late 2016. On a brighter note, commodities had their strongest quarter in at least the last 30 years.

While the crisis in Ukraine overshadowed everything else, if we focus on the equity markets, we can see that a great deal of the damage was already done by late January. In fact, stocks spent more time rallying than declining from late February through the end of the quarter.

It is no surprise that commodity-producing nations were the first quarter's big winners, led at a distance by Latin American equities which posted large double-digit gains.

Canadian and UK shares also earned positive returns during the quarter. While Hong Kong was down slightly, the US, Japan and Europe posted steeper losses. Mainland China shares plummeted from mid-February to mid-March before rebounding, but still finished the quarter with double digit losses.

Interest rates on government bonds rose across all maturities in the US, UK and Euro zone during the quarter. Yield curves flattened as shorter-term rates climbed by more than longer term rates.

The US treasury market saw several instances in which short-term interest rates exceeded long-term rates. Market Watchers refer to this as a yield curve inversion. While this condition often indicates a pending recession, we don't expect to see one this year or next.

Still, bonds delivered negative returns as interest rates climbed.

Inflation index securities had relatively mild declines, while emerging market debt and investment grade corporates tumbled.

We'd be hard pressed to tell the story of the first quarter without a closer look at commodities. These markets were the financial epicenter of the fallout from Russia's attacks on Ukraine and their associated consequences. The price of natural gas spiked by more than 50% during the first quarter, while West Texas intermediate and Brent crude oil prices, both climbed by more than 30%. The price of wheat also finished the quarter more than 30% higher. Consumers felt the downstream impact in their wallets as inflation drove prices higher at the gas pump and at the grocery store.

While higher interest rates appear to be the global trend among central banks, which will increase the cost of borrowing, households and businesses were in good financial shape coming into this rate-hiking cycle. With demand for consumer goods remaining strong, we think it will take some time for major problems to develop in the economy.

Still, periods of crisis and instability are worrying for all investors, particularly as short-term events can be difficult to predict. For this reason, diversification has been one of the hallmarks of SEI's investment philosophy and process. While delivering that message has been a challenge in recent years, as a small segment of the market drove outsize gains, the market conditions we are seeing today reinforce our belief in diversification as a sound investment strategy.

On behalf of everyone at SEI, thank you as always for your trust and confidence.

Important Information 

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. Positioning and holdings are subject to change. All information as of the date indicated. There are risks involved with investing, including possible loss of principal. This information should not be relied upon by the reader as research or investment advice, (unless you have otherwise separately entered into a written agreement with SEI for the provision of investment advice) nor should it be construed as a recommendation to purchase or sell a security. The reader should consult with their financial professional for more information. 

Statements that are not factual in nature, including opinions, projections, and estimates, assume certain economic conditions and industry developments, and constitute only current opinions that are subject to change without notice. Nothing herein is intended to be a forecast of future events, or a guarantee of future results. 

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