The third quarter of 2022 saw global equity markets fall a further 5%, adding to the dramatic 22% ‘bear market’ loss in the first half of the year. There were few places to hide with only the US dollar and bitcoin up in the quarter, and all other major assets falling led by the 20% oil price slump. Even with US inflation now peaked and equity valuations 35% lower this year, uncertainties remain high with the Federal reserve signalling higher-for-longer interest rates.
Central banks have been more aggressively raising interest rates to combat high and increasingly stubborn inflation. This is raising the risk of an imminent recession and corporate earnings plunge. This has boosted the US dollar to multi-decade highs and taken a toll on previous high-flying commodities.
Europe and the UK are the closest to recession as Russia cut off all natural gas supplies at the same time as the European Central Bank raised interest rates at the fastest pace ever. This drove the Euro below parity with the US dollar for the first time in twenty years, and made European equities one of the worst performers in Q3. But governments are now responding aggressively to curb gas prices and support consumers through the inevitable downturn.
The US saw better news with inflation peaking at 9.1% and starting to fall along with gasoline prices. But underlying inflation is sticky and the Federal Reserve accelerated its pace of interest rate increases to 0.75% a meeting to combat. This higher for longer interest rate outlook raised recession fears and reverberated around the world. But US consumers and corporates remain remarkably resilient and still holds out hope for an economic soft landing.
The recovery in China is disappointing given its continued zero-covid strategy and indebted property sector. This has particularly hurt commodities. But different from the rest of the world, China's low inflation has allowed the central bank to cut interest rates, giving it the flexibility to offset this economic weakness.
We see a gradual ‘U-shaped’ equity market recovery as inflation pressures slowly ease and investors worst-fears of a deep economic and earnings recession are not realised. This keeps us fully invested but still focused on mainly defensive assets from healthcare to high dividend yield to manage the high risks. We remain open to select ‘quality growth’ across tech, small caps, and crypto assets, as market volatility throws up opportunities.
