Global equity markets have experienced a volatile start to 2022, with asset valuations being impacted by a rapidly rising inflationary environment, and in turn, what this means from an interest rate perspective.
As inflationary pressure mounted throughout 2021, driven by supply chain constraints and in more recent times energy prices, central banks were left with little option but to shift their monetary policy stance.
The stance from the US Federal Reserve in January 2022 has been the main catalyst for a market sell-off; “With inflation well above 2% and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate”.
Consequently, as the rhetoric around interest rates changed, asset prices have fallen into correction territory and bond yields have risen.
The impact of inflation on markets means US interest rate rises have been fast tracked, to a point where the market has quickly priced in 5-6 rate rises this calendar year, starting at this month’s Federal Reserve meeting. In Australia, we may see rates rise later this year, also much earlier than the planned 2024.
Markets now face a newfound geopolitical challenge, as the recent Russian invasion into Ukraine has added a layer of complexity to the situation.
The trade sanctions imposed on Russia are likely to contribute to inflationary pressure, with higher energy prices being the core reason for this. What history tells however, is that while major geopolitical events can unsettle markets initially, they rarely have a lasting impact.
We expect global markets in the short-term to continue to experience an increased level of volatility and uncertainty, however, this also provides investment opportunities, with high quality businesses also being sold off, allowing entry points at very attractive prices.
If you’d like to have a chat about what’s right for you get in touch with our Wealth Management team.
