Will this market turbulence last?

The first half of 2022 for investors has been characterised by uncertainty and volatility, as global events have conspired to create uncomfortable, short-term conditions.

It means that the initial optimism for sustained, post-pandemic economic growth has now depleted. But will current challenges endure, or is there light at the end of the tunnel?

Four reasons for turbulence

While we advocate always viewing things through a long-term lens, we recognise that short-term market bumps can be uncomfortable and distracting. Our consistent message has always been not to panic, because knee-jerk reactions in such times can do more harm than good.

Having context and clarity during periods of volatility is also important for investors, and with that in mind, here’s our take on the four big topics currently weighing large on investors’ minds. They include:

1. Rising inflation

The post-lockdown inflation that was initially labelled as ‘transitory’, has not only lingered for longer but has also soared to multi-decade-highs.

2. Recession murmurs

Challenging conditions all over the world have put recession risk back on the radar. The change in expectation has been rapid given that 2022 started with such optimism for sustained economic growth.

3. China’s commitment to lockdowns

When the second most influential global economy shuts up shop, it has a ripple effect around the world. China’s ongoing lockdown strategy is starting to impact global trade, ironically at a time when other major economies have long-abandoned their own lockdown plans.

4. The Ukraine war

A brutal conflict with widespread implications for geopolitics, commodity prices, and supply chains. The uncertainty is a source of concern for investors.

Four reasons for longer-term optimism

Despite the challenges, we don’t think the case for long-term investing has weakened, and we also don’t envisage the turbulence enduring. In a nutshell, here’s why:

1. Inflation

Our investment strategy team is seeing signs of stabilisation across a number of important data points such as consumer prices and personal consumption expenditure, as well as wages. And while we can never guarantee an outcome, our view is that the inflation backdrop is beginning to turn the corner. If this materialises, we expect that the US Federal Reserve – the world’s most influential central bank – will gradually soften their language and begin to hike interest rates less aggressively.

2. Recession

While we don’t downplay the significance of a possible recession, we also don’t see a need to panic. Recessions come in various shapes and sizes, and we wouldn’t expect a repeat of the deep pain felt in times such as the 2008/09 global financial crisis. One might also argue that a recession has already been priced in by markets, at least partially.

3. China

While the country’s policymakers currently seem wedded to their zero-COVID lockdown strategy, it would probably only take a small relaxation of current restrictions for markets to feel better about China. There is no sign of when China might take a different route out of the pandemic, but the possibility of life-after-lockdown is reason enough for optimism.

4. War in Ukraine

The brutal escalation of events in Eastern Europe is taking a terrible human toll, as well as causing much friction and uncertainty across global supply chains. An escalation remains a strong possibility but geopolitical flash points are nothing new, and often don’t hinder broader market progression.

Are we there yet?

The next few weeks will likely be volatile, but our core message for investors remains unchanged – stay invested through the turbulence, rather than trying to sell up and return when conditions are looking better.

In our view, staying invested and being diversified certainly feel like the smart plays right now.

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