A relaxed read on the issues of the day
What’s been happening in markets this year?
Since the start of 2022, financial markets have been quite volatile, with global equity markets dropping around 7% and global bonds down 1%. Returns from UK equities have been broadly flat and UK government bonds have fallen 1.8%. Within equity regions, Asian and emerging markets have fared the best so far in January, with both up nearly 1%. This is a reversal from last year when Asia and emerging markets lost money and were weak performers, especially compared to US and European equities. Outside of the traditional equity and bond asset classes, we’ve also seen falls in property securities (REITs) and
infrastructure this year.
What’s behind the falls?
In 2021 inflation proved to be a growing concern for central banks across major economies. Inflation had been anticipated by economists, but the figures have been higher than expected (around 7% in US and nearer 5% in the UK and continental Europe) and look to be more persistent than central banks had originally estimated. Additionally, inflation, which had been driven by rising energy costs and used car prices, has begun to creep into other areas including housing and food prices. Coupled with this, labour shortages have forced businesses to compete for staff, resulting in higher expected wage inflation in 2022. Central banks, such as the US Federal Reserve, have signalled their concerns and are preparing to raise interest rates to combat the high inflation figures. The Fed is preparing to raise interest rates three times
in 2022 due to higher than expected/persistent inflation.
What does this mean for markets?
Investors have become accustomed to an environment of steady economic growth with low interest rates and inflation. This environment has supported returns across asset classes and has been particularly beneficial for bonds, resulting in elevated returns from an asset class that was perceived to be ‘low risk and low return’. However, while the current environment of high inflation and rising interest rates presents headwinds for most asset classes; arguably bonds face the most significant challenge. Meanwhile, we have also seen disruption in equity markets with an abrupt shift in the best performing stocks. On the whole, trends in equity markets over recent years have favoured growth style equities, but in an inflationary environment this style tends to lag the value style, at least in the short term. At a regional level, equity performance has reflected the type of businesses in the index and has been impacted by the change in interest rate forecasts. The US, for example, has a bias to technology (growth style) and with a series of interest rate rises planned, has been hit hard. After a difficult 2021, Asia and emerging markets have held up a bit better this month as China, the key economy in the region is moving in the opposite direction to other nations and increasing stimulus to its economy in the wake of an economic slowdown.