Second Quarter 2022
Faltering momentum amid a growth shock
During the first quarter, we expected the global economies in 2022 to be in a mid-cycle expansion cycle, with the Asian economies set to grow as a result of the post-COVID recovery. There was a debate over whether the negative effects of high inflation or the positive effects of strong global growth would most likely be the driver of markets for the year. However, volatility in the first quarter of 2022 spiked, driven by the combination of two key risks: high inflation and the Russian invasion of Ukraine.
Investors who turned bearish were largely influenced by the investment view that markets were overly held up by supportive monetary and fiscal policy spending by governments worldwide. Once the US Fed committed to aggressively raising rates, these investors doubted the ability of markets to sustain performance without central bank support.
Our views remained more bullish in 2022, despite the rising interest rates. We view earnings growth as more highly correlated with equity market performance than central bank balance sheets. Assuming there are no further geopolitical shocks, the outlook for earnings growth in 2022 could remain strong even if rates rise.
That said, it is impossible to rationally project how Russia is going to act and is challenging to forecast what the impact of increased rates and sanctions will be on global growth. While assessing all these risks, we believe it is prudent to retreat to a more cautious position.
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