2022 has been an unusually volatile year for markets. After a 10-year bull run , many investors felt an air of invincibility around equity markets and thought this run still had some legs in it. However, this year we have seen almost all investment types being sold at material discounts and negative returns in all but one month of the year so far.
This article may be overly simplistic in certain areas for some readers but I still think simplifying these issues is the best way for investors to understand why their returns have been so poor this year and how the situation could unfold in the next 12-18 months.Inflation has been the big point of discussion in 2022. It is almost impossible to speak about market performance without mentioning it. This year we have seen a rise in inflation across most developed and emerging market economies.
Simultaneously, these interest rate hikes tend to negatively affect risk assets. Increases in interest rates result in a shift of assets from equity to safe-haven assets that offer a guaranteed or at least more predictable, and less volatile return. This is essentially because the risk-reward ratio changes. Here’s how: Let’s say cash previously offered returns of 4% p.a. and is now offering 6% p.a., due to an increase in interest rates.
Many analysts believe that , inflation has reached its peak. While the recent above-expectation print of 8.30% in the US shows inflation may stick around a while longer than initially predicted, it does seem like the worst may be behind us. In fact, in the US, there are growing predictions that the Fed will pause and lower rates in response to lower inflation and recessionary conditions from Q3/Q4 next year. This should give markets a boost.