It has been a wild ride in markets through 2022 year-to-date. A confluence of Omicron, Russia and Ukraine uncertainties, high inflation and central bank communication has bashed equities lower and moved sovereign bond yields higher. Table 1 shows the extent of these moves in the few weeks since the year began, as of 24 Jan 2022.

Table 1: Market moves to 24 January 2022
Interest rates (%) Close 1 week YTD Equities Close 1 week YTD
RBA cash 0.10 0.00 0.00 S&P/ASX200 (Australia) 7140 -3.7% -4.1%
3-year Aus bond yield 1.35 0.08 0.44 S&P500 (US) 4410 -5.4% -7.5%
10-year Aus bond yield 1.94 0.02 0.27 FTSE 100 (UK) 7297 -4.1% -1.2%
Fed Funds rate 0.25 0.00 0.00 DJ Stoxx 600 (Europe) 456 -5.8% -6.4%
2-year US Treasury yield 0.97 0.00 0.24 Nikkei 225 (Japan) 27588 -2.6% -4.2%
10-year US Treasury yield 1.77 -0.01 0.26 CSI 300 (China) 4787 0.4% -3.1%
ECB rate -0.50 0.00 0.00 Hang Seng (HK) 24656 1.8% 5.4%
2-year German yield -0.65 -0.09 -0.03 MSCI World 3006 -5.4% -7.0%
10-year German yield -0.11 -0.08 0.07 Currencies Close 1 week YTD
US IG Credit spread (bps) 1.04 0.05 0.07 AUD/USD 0.7145 -1.0% -1.6%
US HY Credit spread (bps) 3.59 0.26 0.35 EUR/USD 1.1326 -0.7% -0.4%
Commodities Close 1 week YTD USD/JPY 113.95 -0.6% -1.0%
Brent Oil (USD/bbl) 86.27 -0.2% 10.9% GBP/USD 1.3488 -1.2% -0.3%
Gold (USD/oz) 1843 1.3% 0.8% USD/RMB 6.3307 -0.3% -0.4%
  USD Index 95.918 0.7% 0.3%

Source: Oreana Portfolio Advisory Services, Bloomberg LP

The abruptness of the moves is noteworthy. They have been punctuated by the price action on 24th January, which saw the US S&P500 reverse a 3.98% decline at the middle of the trading day with 4.41% increase to close the day higher. This is the third largest intra-day reversal since data were available in the late 1970s.

Fig 1: A remarkable reversal overnight in the USS&P500 on 24 January 2022

Source: Oreana Portfolio Advisory Services, Bloomberg LP

Given the challenges that volatile markets are presenting right now, we have five key points for consideration.

1. Look through the volatility

Corrections happen regularly. Figure 2 shows how frequently a 5% correction in US equites over a 3-month period occurs. The S&P500 is currently 8.1% off its Christmas time peak. It is tempting during these volatile periods to take knee-jerk reactions that are not aligned to your investment process. We recommend relying on strong governance, looking through the volatility, and sticking to your investment process.

Fig 2: A 5% correction in markets over a 3-month period happens frequently.

Source: Oreana Portfolio Advisory Services, Bloomberg LP

2. Central banks will hike – but by less than expected

Inflation is high. Australia’s headline CPI inflation increased to 3.5% in Q4 – above the RBA’s 2%-3% target. US headline CPI inflation increased to 7.0% in December, the highest in decades. Both central banks will need to hike rates this year. Figure 3 shows markets now expect three hikes by September, compared with just two hikes expected back in December (and just one hike expected back in November!). Higher cash rates mean higher sovereign yields.

We have been expecting higher sovereign yields for some time and moved to a Highly Unattractive rating back in July 2021. But we have consistently pushed back on market pricing for almost four rate hikes over 2022. Instead, we expect inflation will begin to ease in Q2 and that will allow the Fed and the RBA to hike fewer times than markets expect.

Fig 3: Markets have priced progressively more rate hikes in the US since November 2021.

Source: Oreana Portfolio Advisory Services, Bloomberg LP

3. Higher rates will be a challenge for equities – but focus on earnings.

Higher cash rates increase the discount rate for valuing equities. That has been a big challenge for growth and tech stocks. But we prefer to focus on the fundamentals – earnings growth and payout ratios.

Figure 4 shows earnings growth surged in 2021 in the US. A similar surge occurred in Australia. We expect earnings growth to slow, but remain high. Corporate and analyst guidance is aligning with our view as we progress through Q1 earnings season. But we still expect strong revenues and limited margin compression to result in high single or low double digit earnings growth for 2022. That means upside earnings surprise – and resilience for equities.

Fig 4: Earnings growth surged to an unsustainably high level

Source: Oreana Portfolio Advisory Services, Bloomberg LP

4. Scenarios are a good way to manage market volatility.

In Oreana Portfolio Advisory Services 2021 Medium-term Global Outlook, released in early March 2021, they set out a range of scenarios that they expected would be important over the medium-term. Figure 5 shows a key scenario was an inflationary shock. This envisaged central bank stimulus leading to higher inflation, requiring central banks to tighten policy too fast. They fully specified this scenario and used it to test the resilience of our portfolios. Having access to these portfolios is a great way to ensure you are prepared for these market shocks – and aren’t tempted to implement knee-jerk reactions.

Fig 5: Our 2021 Medium-term Outlook scenarios help us to prepare for market shocks.

5. Understand your investment objectives and stick to your processes.

The recent wild market movements have challenged investment returns. It highlights the importance of knowing your portfolio objectives, and your processes. In November, we received many queries about bitcoin, given the eye-watering moves higher shown in Figure 6. Would it be an appropriate inflation hedge? Should it be added to portfolios to diversify? We shared our perspective that we didn’t see it as an asset in our investment framework. And we didn’t have clarity in its objective within the portfolio – we just weren’t sure it would be an inflation hedge.

Fig 6: Bitcoin moves have been extremely volatile, highlighting the importance of sticking to a process.

Source: Oreana Portfolio Advisory Services, Bloomberg LP

The price action since has highlighted the importance of sticking to the investment framework. We would reiterate the importance of this as markets remain volatile.  This means:

  • If you are a strategic asset allocation investor, be prepared to rely on diversification and ride out the near-term volatility.
  • If you employ dynamic asset allocation, be open to significant market dislocations and make changes accordingly.
  • If you employ tactical or opportunistic portfolio changes – particularly for direct investors, rely on your processes and governance to implement.

Contact us

We are committed to supporting you and your investment goals. For further information or assistance, please contact your Bentleys advisor.


Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.

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