A look at the first half of 2022

To understand the performance of world markets over the last six months, we have to understand where we are coming from. In 2018 most world equity markets performed badly, but we saw a good rebound in 2019. The sentiment was positive going into 2020 and then our world came crashing down with the outbreak of Covid-19.

Equity markets fell dramatically as they always do when uncertainty creeps in, but thanks to an unprecedented stimulus by most central banks, a sharp V-shaped recovery followed and we had positive returns at the end of 2020.

In 2021 human ingenuity created a vaccine in record time, making markets very happy. Added with the free money from governments, a huge party started which resulted in shares and bonds becoming dangerously overvalued.

Toward the middle of 2021, this party caused inflation to rise and due to the lockdown rules all over the world, the supply of goods and services slowed down, causing prices to rise even further. The Federal Reserve (Fed) in the US made a big mistake when they claimed that inflation was transitory and that they had to keep on stimulating the economy with low-interest rates. At the beginning of 2022, the final nail was driven into the coffin when Russia invaded Ukraine, causing oil and gas prices to rise, as well as prices of wheat and other Ukraine exports.

What followed, was a severe post-party hangover called 2022, and the results look like this:

JSE All Share Index -10%
S&P500 -21%
Nasdaq -30%
Eurostoxx 50 -20%
Shanghai -7%
R/$ -2%
R/Euro 6%
R/Pound 8%
SA prime interest 8.25%

The South African equity market performed relatively well initially and the Rand also remained stable due to the positive impact of rising commodity prices. However recently, we have been seeing this advantage rolling over because of the next storm brewing on the horizon – called recession.

The reasoning behind this is simple: if you increase interest rates, economic activity will slow down and demand-pull inflation should come down. This slowdown is delayed and you will see the effects of higher interest rates only a few months later. If you increase interest rates too much, you could also slow down the economy too much, resulting in negative growth which is very negative for everything, including commodities.

Currently, the big question is whether we will see a recession in the US and how much of this is already priced into the forward-looking equity and bond markets? The answer is still a bit hazy at this time and will depend on a couple of things. If the oil and gas prices can come down, China can stop their Covid lockdown policy, the delivery of goods and services can normalise and the Fed can manage a soft landing in their economy. Then we will be much closer to a bottom than a top in equity and bond prices and we may see a very good recovery during the second half of 2022.If something unforeseen aggravates the current situation then we will probably not see much of a recovery, but it is also unlikely that we will see another 20% drop from where we are now.

It seems like 2022 will give back a lot of what 2021 gave us and that is just the way investments work. We have to remember that a reasonably expected return on equities over time is around 6% above inflation and not the 20% moves we have experienced over the last couple of years. We also have to remember that in an overly pessimistic market, the good and bad shares all go down, but the good shares will bounce back when things return to normal.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your specialist adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

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