Where inflation had been blithely ignored by most asset classes and central banks in 2021, so far in 2022 the theme has gripped markets and negatively impacted portfolio performance. Quarter two saw further inflation pressure from lockdowns in China adding to the inflation shock caused by the invasion of Ukraine in quarter one, and inflation’s build up in 2021.
In response, central banks countered with a sledgehammer approach to raising rates in May and June. The impact of central bank’s abrupt turnaround in rates policy (a policy error of historic proportions) on asset prices was immediate with markets weakening materially late in the second quarter as talk of a rates induced slowdown and possible recession abounded.
Looking ahead, with asset valuation multiples at long term averages, and rates expectations moderating, the question is how soon conditions and returns improve.