Following the euphoria of 2021 when the global economy staged its most robust post-recession recovery in 80 years, market volatility has increased considerably. Unfortunately, the fastest and biggest monetary and fiscal response to an economic crisis did not come without a cost – inflation.

2022 began with inflation in many of the world’s biggest economies at decade highs. US inflation for instance registered 7% at the end of December 2021 – the highest level recorded since 1982. Many central bankers at the time hoped some inflationary pressures, such as supply bottlenecks, would prove transitory allowing for a measured response. However, this hope quickly faded when Russia (the world’s 4th biggest oil producer) invaded Ukraine (the world’s 2nd biggest wheat producer). As food and energy prices rocketed, central bankers were confronted with a new reality – hike rates aggressively, or risk losing credibility by allowing inflation to become entrenched for the long-term. Wisely, they chose the former, evidenced by the US Federal Reserve raising interest rates by 0.25% in March, 0.50% in May and 0.75% in June. Currently, the median expectation of Fed members is that US interest rates will be between 3.25% and 3.50% by the end of the year, up from their expectation of 0.75% to 1.00% just six months ago. This aggressive rate-hiking trend has been mirrored by other central banks around the world at a time when rising costs are hurting both consumer and business confidence. Thus, a significant economic slowdown appears all but inevitable, with markets (both bond and equity) now pricing in a high probability of a global recession in 2023.

Apart from commodity stocks (the prices of which have benefited from constrained supply as a result of the Russia/Ukraine war), high inflation and slowing economic growth has been bad news for just about every asset class year-to-date (31 July 2022):

• Developed market equities and bonds have declined by 13.9% and 13.5% in US dollars respectively
• Emerging market equities and bonds have declined by 17.7% and 19.2% in US dollars respectively

In anticipation of challenging market conditions, we have positioned our portfolios accordingly, as mentioned in our 2022 Expectations Report.

“Looking ahead to 2022, as the economic recovery from the Covid-19 crisis begins to burn itself out, due to reduced monetary and fiscal stimulus, market conditions are likely to become more challenging. Nevertheless, we remain optimistic that our portfolios will continue to produce good outcomes as the next phase of the economic cycle is one that will more likely favour income focused investing due to the emphasis placed on quality, resilience and dividends.” Expectations Report 2022

Courtesy: Marriott

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