Q4 2021

2022 has begun with a strong and often violent sell-off in equity markets, centred around growth stocks. This has been driven by inflation well above target in the US and the action the US Fed will take to bring this down to the target of 2%. Whilst the focus has clearly been on growth stocks in the early weeks of 2022 given the extreme price moves, it is worth bearing in mind that supposedly lower risk assets have also suffered. Global bonds are down over 2% and investment grade close to 4%, its worst start to the year ever. Many risk assets are at prices which could be brought into question as interest rates rise.

This is a changed environment. We are exiting a prolonged period of falling interest rates, accommodative monetary policy and declining and subdued inflation. The focus is on the pace of interest rate hikes and whether the Fed is behind the curve in tightening policy to bring inflation to target and as a result how aggressive they may need to be. Investment approaches which have worked over the last decade, predicated on low and declining interest rates, are unlikely to be the best approach during this period. Overarching, with uncertainty over the path of inflation, increasing interest rates and the Fed reducing its balance sheet (which on this scale has never been done before), we believe this is a time to be cautious.