The first half in review

A difficult start to the year for markets only got worse as the months progressed

It’s summertime, but the going is anything but easy in financial markets.  A difficult start to the year for markets, only got worse as the months progressed.  Investors looking for relief have found few safe havens, if any.  

US Treasuries, traditionally a go-to asset in times of trouble and a benchmark for global borrowing markets, have suffered double digit declines, with consequent reverberations across the whole credit markets.  Russia’s invasion of Ukraine has accelerated an already fast-rising inflation, forcing central banks to speed up interest rates hikes and investors licking their wounds from the opportunity cost of holding fixed income securities.

The first half of 2022 marked the worst period for equity markets in more than 50 years.  US equities slumped into bear market recently as the Federal Reserve hiked interest rates to try and bring down soaring inflation.  US rates are currently set for a range of 1.5% to 1.75%, and will certainly continue to rise in the coming months given inflation is running above 8 per cent.  High inflation and hiking interest rates will inevitably lead to reduced spending from consumers, and equities are the resulting casualty.

The S&P 500 has fallen just over 20 per cent so far in 2022, its worst performance since the 1970.  The Dow Jones is down 15 per cent, while the Nasdaq has performed even worse, losing just over 30 per cent so far, its biggest half-year loss ever.  

Other indices around the world have also struggled, with the Euro Stoxx 50 down 20 per cent and Asia’s MSCI index down 29 per cent.  Against this backdrop, the UK’s FTSE 100 index stood out, generating a drop of a mere 4 per cent, thanks to its relatively high exposure to mining companies and banks which thrived through most of the first semester.

Equity markets have been notorious in recent years for being overly positive, creating a bubble of easy money from quantitative easing.  Given the challenging outlook globally, it remains to be seen whether further losses are to come for equity markets.  Some, though, are tying to see the glass half full.  Beaten-up Chinese equities for example are transitioning to the traditional definition of a bull market, since they are up almost 20 per cent from their trough.  Moreover, some market commentators have been quick to point out that the worst five episodes of the past first half performances for the S&P 500 before this year’s slump, have all been followed by big bounces in the second part of the year.

Other assets and commodities have also got off to a bad start in 2022.  Crypto currencies have suffered one of their worst selloffs in recent years.  Since peaking in March, Bitcoin has halved in value, while Ethereum is down a shocking 70% so far in 2022.  Industrial commodities like iron and copper have also fallen as Covid lockdowns in China and slowing growth elsewhere it manufacturing.

Meantime, strong gains in the US dollar has seen it rise by 9 per cent against a basket of the main world currencies in the first half, and it is up by a far larger 15 per cent against the Japanese yen, which has been left at its weakest level since 1998.  At the other end of the spectrum, the Russian rouble is, on paper, up 40 per cent.  This is not an accurate reflection of its value, however, because Western sanctions on Russia and the country’s own domestic capital controls mean that the currency cannot be freely traded anymore.  

For precious metals it has been a mixed bag.  Gold in particular has held up well, and remains one of the best performing assets in 2022, albeit still lower for the year in US dollar terms.  As an industrial metal, silver has fared worse, down 15 per cent in US dollar terms.  Elsewhere, platinum and palladium proved more resilient likely due to reduced supply given the ongoing sanctions on Russia.

Disclaimer: This article was written by Stephen Borg, Head of Private Clients at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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