Taking Stock Winter 2022

After the storm

No one expected 2022 to be an easy year for markets. Here's what's worrying investors.

19 Aug 2022

3 minutes

Jeremy Gardiner

The first half of 2022 was tough. Very tough. So, if you’re feeling a bit battered and bruised, a bit depressed, you’re quite entitled. The S&P 500 was down 20% over this period, its worst performance in 60 years; the US 10-year bond had its worst performance in 234 years, so it’s almost certain the second half of 2022 will be better.

Nobody expected this to be an easy year. Markets expected inflation and interest rate hikes. But the US Federal Reserve was in control; inflation was going to be ‘transitory’, and rate hikes were already priced in. Markets don’t mind rates rising; in 11 of the last 12 rate-hiking cycles, the S&P 500 apparently delivered positive returns.

What markets don’t like is surprises.

Vladimir Putin invading Ukraine was a surprise. Food and oil prices rocketed, pushing inflation higher than expected. Chinese Covid lockdowns also didn’t help. Global supply shortages sent prices soaring, also stoking inflation.

Assets everywhere were punished.

And that’s where things started to get messy. With prices rising much more than expected, central banks found themselves ‘behind the curve’, raising rates more than markets expected. Markets got a fright, panicked, and assets everywhere were punished.

As positive as rising rates are for the dollar, it is the worst environment for emerging markets, their currencies, and of course, the rand. If there’s any consolation, everybody, everywhere is hurting. High food, fuel and rate hikes are an explosive cocktail of pain.

With inflation in most countries approaching double figures, people are demanding inflation-plus salary increases. Governments, in turn, having sunk further into debt during Covid, are struggling to meet these demands, and as a result, everyone, everywhere is striking.

Rate hikes are hurting growth. If the story of 2022 is inflation and interest rates, 2023 will be all about growth (or more accurately the lack thereof) and potentially rate cuts.

What markets and economies worldwide need is to be able to see the peak in inflation, and therefore interest rates.

That will slow the dollar and then hopefully, China provides some much-needed confidence and stimulus after their November policy conference.

Those two factors should see global investors, apparently sitting on ultra-low levels of equities and similarly high levels of cash, feeling confident enough to return to markets.

If you’re feeling down, you’re not alone! Everybody everywhere is feeling the same.

Keep an eye on these global issues:

  1. Russia/Ukraine – some form of resolution that leads to a cessation of hostilities would help enormously.
  2. Chinese lockdowns – looking a lot better, but due to the heavily policed success of their previous lockdowns, they still have relatively low levels of herd immunity. When you have a population of 1.4 billion, any outbreak could overwhelm their health services and see them locked down again.
  3. China/Taiwan – with both Asia and Europe upping the geopolitical ante, two wars would be too much to digest. It’s unlikely, but any aggression will spook markets.

So, in summary, if you’re feeling down, you’re not alone! Everybody everywhere is feeling the same.

And you can blame Vladimir Putin. Without his antics in Ukraine, food and fuel prices would have been far more muted, inflation would have been transitory, interest rates measured, and growth would have stayed well clear of recessionary clouds.

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Authored by

Jeremy Gardiner
Director

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