High inflation, geopolitics, the Russia-Ukraine war and a looming recession sent equity market indices tumbling into bear-market territory during the first six months of 2022, prompting investors to seek safe havens and find tactical investment opportunities to take advantage of current market conditions.
Alternatively, investors with a longer-term strategy could use such an environment to acquire shares in quality companies trading at significant discounts and with the potential to recover strongly once economic growth returns. While it looks possible that the US may enter a recession during the second half of this year, as with all things in global markets, it is challenging to predict these events with any certainty. What is clear is that the US will experience a reduction in economic growth caused by the aggressive monetary tightening of the US Federal Reserve.
Ukraine is also one of the major producers of wheat and suppliers of fertiliser to the world, and the subsequent loss of the supply of these key commodities has also contributed to the current high levels of inflation, resulting in a significant supply-demand mismatch for commodities in the market. Real estate has also historically done well during such periods as the effects of inflation get passed through to rental escalations and mortgage rates are typically fixed, while the replacement value of assets also rises.
Other options that have historically provided protection during stagflation include inflation-linked government bonds and gold. The iShares TIPS Bond ETF and iShares Gold Trust ETF can be expected to perform better than other asset classes.
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