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After the relative calm of 2021, volatility has returned in 2022.
We have talked previously about the backdrop of the pandemic lockdowns. Globally, markets closed for long periods followed by a sudden restart of economic activity with bursts of demand across sectors. This had the effect of increasing inflationary pressures, which in turn led to sooner than expected interest rate hikes. Markets generally fell in January with a turbulent start to the year. The resulting volatility peaked in February when Russia threatened to invade Ukraine placing troops at the Ukrainian boarder. On February 24th in the early hours of the morning Russia invaded Ukraine and the markets responded by dropping further.
The immediate impact of the war was a supply chain shock, which had the effect of accelerating price pressures from commodity markets, particularly oil and gas. The supply chains of metals and grains have also become less reliable, and this coupled with the boosted demand from the reopening of world economies has seen inflationary pressures not seen in 40 years.
Rapidly surging inflation, rate hikes and geopolitical risk are now emerging as the three major themes dominating and driving the financial markets. The economic sanctions placed on Russia as we move away from Russian oil supplies will add to this inflationary risk. Equities fell sharply during the quarter, Eurozone and US markets being the hardest hit. Once again, the message is that diversification is key as is the long-term nature of investing. The outlook for 2022 remains cautious yet positive. There is evidence of wage growth, high employment, and healthy savings levels. Corporate earnings also remain robust. Global growth this year should remain above trend which in turn should support equities over bonds and cash, but the conflict has caused uncertainty which means more market volatility ahead.
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