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Red hot commodities
What does the chart show?
The chart shows the performance of the MSCI World sector indices year-to-date, in total return dollar terms. The notable outperformers so far this year have been the energy and metal sectors supported by higher underlying commodity prices, boosted by elevated demand and tight supply. Financials began the year outperforming most other sectors as the outlook for a higher interest rate environment benefits these companies through higher net interest income, however, Russia’s invasion of Ukraine spooked investors, sending most sectors into negative territory.
The worst performing sectors this year have been information technology, consumer discretionary, and communication services. The prospect of higher interest rates has a greater negative impact on growth stocks as the interest rate used to discount their higher future earnings increases, meaning the present value of those earnings decreases. Furthermore, the consumer discretionary sector is more sensitive to prospects of lower growth and slower consumer spending.
Why is this important?
The first quarter of 2022 was driven by two powerful shocks: Russia’s invasion of Ukraine and the Fed’s sharp hawkish shift in policy. The immediate consequences of the war produced surges in energy and other commodity prices and further disruptions to key commodity markets and supply chains, exacerbating the damage inflicted by the pandemic. It is now the indirect consequences of the war that are increasingly driving financial markets and are likely to do so in the months ahead.
The focus has shifted to the inflationary implications, the surge in commodity prices, damage to supply chains, the risk of shortages, and the extent to which central banks will tighten policy to combat this more persistent inflation. The large-cap UK equity index has been a standout performer year to date, buoyed by its significant weight to energy and miners. A lot of ‘value’ managers have benefitted from long-standing overweights to these sectors. On the other hand, the technology dominant US market has endured a more challenging period, as have ‘growth-focused managers with overweights in tech and consumer discretionary stocks.
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By Mondial DubaiWhat does the chart show?
The chart shows the performance of the MSCI World sector indices year-to-date, in total return dollar terms. The notable outperformers so far this year have been the energy and metal sectors supported by higher underlying commodity prices, boosted by elevated demand and tight supply. Financials began the year outperforming most other sectors as the outlook for a higher interest rate environment benefits these companies through higher net interest income, however, Russia’s invasion of Ukraine spooked investors, sending most sectors into negative territory.
The worst performing sectors this year have been information technology, consumer discretionary, and communication services. The prospect of higher interest rates has a greater negative impact on growth stocks as the interest rate used to discount their higher future earnings increases, meaning the present value of those earnings decreases. Furthermore, the consumer discretionary sector is more sensitive to prospects of lower growth and slower consumer spending.
Why is this important?
The first quarter of 2022 was driven by two powerful shocks: Russia’s invasion of Ukraine and the Fed’s sharp hawkish shift in policy. The immediate consequences of the war produced surges in energy and other commodity prices and further disruptions to key commodity markets and supply chains, exacerbating the damage inflicted by the pandemic. It is now the indirect consequences of the war that are increasingly driving financial markets and are likely to do so in the months ahead.
The focus has shifted to the inflationary implications, the surge in commodity prices, damage to supply chains, the risk of shortages, and the extent to which central banks will tighten policy to combat this more persistent inflation. The large-cap UK equity index has been a standout performer year to date, buoyed by its significant weight to energy and miners. A lot of ‘value’ managers have benefitted from long-standing overweights to these sectors. On the other hand, the technology dominant US market has endured a more challenging period, as have ‘growth-focused managers with overweights in tech and consumer discretionary stocks.