In February 2022, Russia did the unthinkable in modern history by launching a full-scale invasion of Ukraine that nearly brought the global financial landscape to its knees. This geopolitical risk created panic in the markets of a possible third world war, thus plunging the world markets into uncharted territories.
As if that weren’t enough, the ripple effects of Covid-19 continued to hit global markets, causing something of a short-term volatility seesaw. On top of that, rising inflationary pressures in many geographies added to the difficulties in financial markets, producing an unexpected performance for the period. Soaring inflation rates were followed by countermeasures by monetary authorities, such as rate hikes to curb simmering economic activity, persuaded by growing money supply, supply chain constraints supply, soaring energy prices and disruptions to agriculture.
From experience, this current environment is arguably the most challenging, compared to the dot.com and the global financial market crisis of 2008. The main difference is that most central banks have to deal with rising inflation that has not been seen for decades.
High inflation for decades has only been exacerbated by the ongoing Russian-Ukrainian war, which has severely disrupted global financial markets and sent commodity prices such as oil, gas and minerals skyrocketing. agricultural products. These headwinds significantly affected the short-term performance of most monitored asset classes.
In response to inflation, most central banks began to raise interest rates sharply. Persistent rate hikes dampen economic activity by squeezing consumer pockets and slowing consumer spending, and therefore slowing demand and inflation. The problem is that central banks are currently raising rates in an already weak economic environment and thereby risk plunging the world into an economic recession and negatively affecting global financial markets.
On top of that, although the effects of Covid-19 are dissipating as most countries return to normal, markets are still experiencing the ripple effect, causing short-term market swings. Supply chain constraints led by Covid-19 still pose a threat to profits for most manufacturing companies.
Put all of the above together and you have an extremely difficult investing environment to navigate.
While the effects of short-term volatilities cannot be overlooked, our advice in these difficult times is to always have a long-term directional view that will cushion investment in such market downturns. Adopting a cautious investment approach in these difficult times clouded by market uncertainties and being attentive to opportunities that stimulate growth are likely avenues to pursue.
Notwithstanding the devastating effects of the Russian-Ukrainian war on civilians and the economy, we are of the opinion that the war in Ukraine continues and will constantly cause short-term market fluctuations, which therefore requires a grounded pragmatic approach on capital preservation and growth.
We expect supply chain issues to dominate in the short to medium term, pushing inflation levels to record highs – as is the case in the US and the Eurozone. This will further push most central banks to implement multiple rate hikes to contain the inflation spiral, which as mentioned above is likely to push the world into an economic recession.
Based on this view, a consistent investment approach that can skillfully shift asset allocations to protect assets under management is recommended. This new normal has shifted risk appetites to a “conservative-moderate” profile while being alert to any recovery in the current economic cycle.
Although no one can accurately predict the future, a consistent, well-oiled investment approach managed by skilled staff can protect a portfolio from unprecedented losses. Throughout history we have experienced cyclical periods like these, so our advice is to take a long-term view of your investment portfolio.