The turmoil across international financial markets which started off at the start of the year exacerbated further in the second quarter amid more evident and stronger signs that high inflation is far from a “temporary” or “transitory” phenomenon. Indeed, several indicators have been showing the spread of high inflation across multiple aspects of life, be it in food, energy, commodities, raw materials, machinery/equipment, shipments and also wages.
This unexpected shock was first a reflection of the after-effects of the COVID-19 pandemic as the world economy went through a prolonged and unprecedented period of disruption. In hindsight, the massive interventions by governments and major central banks to safeguard livelihoods and shore up economies during the pandemic also had the undesired effects of contributing to significant imbalances which exerted additional burden on the factors of production and supply chains.
More recently, the war in Ukraine has not only been a huge tragedy from a human aspect, but also a cause for deep political divisions with enormous economic costs for all parties concerned.
The quick transition to the current high inflationary environment has also been immensely underestimated by economic policymakers and central banks alike after several years of low or well-controlled inflation. In fact, in Europe and Japan, a recurring theme only a few years ago was the peril of subdued inflation, which sometimes even verged on the brink of deflation, reflecting structurally weak economic activity.
The impact of the high inflation figures across international financial markets over the past six months has been material. Understandably, fixed income securities were at the forefront of the fallout as yields spiked, reflecting the decisive actions taken on board by the US Federal Reserve. In aggregate, the US central bank hiked its target range for interest rates by 150 basis points.
Furthermore, from June 1, the Federal Reserve started reducing its significant holdings of Treasury, agency and mortgage-backed securities. This quantitative tightening process is expected to intensify further in the coming months along with additional interest rate increases to above the three per cent level.
In Europe, although the European Central Bank’s response to high inflation has so far been relatively muted, prices of bonds still tumbled amid spiralling yields. In fact, the 10-year German Bund yield touch a multi-year high of almost 2% in mid-June 2022 compared to a level of -0.18% at the end of 2021. This naturally also had a knock-on effect on the prices of Malta Government Stocks as already articulated in our previous articles. Indeed, various MGSs posted sharp double-digit declines, with the 2% MGS 2051 plunging by 27 percentage points to 76.14% from 103.49% at the end of 2021.
Overall, the RF MGS Index shed 12.8 per cent in the first half of 2022 with the decline intensifying in Q2, 2022 (-7.8%) following a decline in the index of 5.4% in Q1, 2022. In contrast, the RF Malta Corporate Bond Index eased by 1.3% in the first six months of the year. This drop is minimal when compared to the performance of other international frontier and high yield corporate bond markets.
Across international equity markets, all major indices in the US, as well as Europe, suffered double-digit declines in Q2, 2022, except for the UK FTSE 100
(-4.6%) and the Spanish IBEX 35 (-4.1%). In particular, the tech-heavy Nasdaq Composite shed 22.4% in Q2, 2022, while the S&P 500 and the Dow Jones Industrial Average slid by 16.5% and 11.3% respectively. Both the S&P 500
(-20.6%) and the Nasdaq Composite (-29.5%) ended H1, 2022, in bear territory, while the Euro Stoxx 50 (-19.6%) and the German DAX 30 (19.5%) only just avoided entering bear market.
Meanwhile, Maltese equities proved to be somewhat resilient to the ongoing market turmoil across continued very weak activity. Although the MSE Equity Price Index slipped by 7.2% in H1, 2022, it recorded a minor uplift of 1.1% in Q2, largely on the back of the strong rebound in the share price of Bank of Valletta plc following the €182.5 million settlement agreement in respect of the Deiulemar litigation.
Elsewhere, contrasting developments also took place in the prices of the main commodities, such as gold (which is widely regarded as one of the safest havens), silver and oil. Although the prices of gold and silver drifted by a minimal 1.2% and 3% in H1, 2022, it is pertinent to point out that gold declined by 6.7% in Q2, while silver tumbled by 18.2% during the same period. On the other hand, the price of oil advanced by over 40% in H1, but most of this upsurge (+33%) took place in Q1.
The downturn across all asset classes in recent months is another timely reminder of the importance for investors to maintain long-term objectives when building investment portfolios. Although many market commentators and analysts expect the coming months to continue to be highly uncertain and turbulent, on the other hand, history has repeatedly showed that while timing the market is virtually impossible, it is during such volatile times that the best opportunities emerge.
Simon Psaila is portfolio manager at Rizzo Farrugia.
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