The second quarter of 2022 was an incredibly challenging period for investors as the MSCI All Country World Index, a broad measure of global equity markets, fell 16%. Stock prices experienced a sharp decline during the quarter as central banks opted to accelerate the pace at which they raise interest rates owing to historic levels of inflation which are proving to be stubbornly resistant. In what appears to be somewhat of a vicious circle and is adding further downward pressure to stock prices, is the possibility of a recession in the nottoo-distant future, the likelihood of which increases as central banks continue to hike interest rates.
The persistently high level of inflation in both the US as well as Europe has seen their central banks, as well as many others across the globe for that matter, become increasingly hawkish. With US inflation still trending above 8%, the US Federal Reserve (“Fed”) opted to raise interest rates by 50 basis points in May followed by an additional increase of 75 basis points in June, the highest single increase in nearly three decades. The UK continued with its trend of raising interest rates as the Bank of England implemented two 25-basis point increases during the quarter. In somewhat of a surprise for markets, for the first time in 15 years, the Swiss National Bank raised its benchmark rate. The 50-basis point increase saw the Swiss benchmark rate increase to minus 0.25% as inflation levels in the country reached 2.9%, their highest level in over a decade. The European Central Bank (“ECB”) has to date kept its powder dry but with inflation in the region continuing to trend above 8%, the ECB now intends to raise its benchmark rate by 25 basis points in July with the possibility of an even larger increase in September.
Not many stocks escaped the selling pressure during the quarter as the decline in stock prices was broad-based though some fared better than others. Though there were declines in the MSCI All Country World indices for Consumer staples (-6%), Health Care (-7%) and Utilities (-7%) their relative outperformance during the quarter suggests a pattern of investors positioning themselves for a potential recession. On the other end of the spectrum, stocks more closely associated with economic growth that are likely to underperform during a recessionary period were harder hit. As a result, there were steep declines for stocks within the Consumer discretionary and Industrials sectors as reflected by the respective declines in the MSCI All Country World Consumer discretionary (-21%) and Industrials (-16%) indices. The MSCI All Country World Financials index also fell heavily as even financials, which should benefit profitability-wise from higher interest rates, suffered with investors fearful of a stall in lending should a recession ensue. The stock prices of growth-orientated stocks have benefited from lower interest rates, especially during the pandemic, owing to their longer duration profile. It therefore follows that a rise in interest rates would have the opposite effect leading to relatively greater falls in their stock prices. As such, we saw large declines in many TMT (Technology, Media, and Telecommunication) companies leading to large declines in the MSCI All Country World Information technology (-23%) and Communication services (-18%) indices.
Following the onset of the Russian invasion of Ukraine, we saw a surge in commodity prices due to the prospect of supply shortages resulting from the conflict in the region. However, with central bank rate hikes serving as a potential brake to economic growth, demand concerns have counterbalanced those on the supply side leading to a cooldown in commodity prices, specifically certain industrial metals. The steep fall in the prices of the various metals was mirrored in the fall of global metal and mining stocks with the MSCI All Country World Metals and Mining Index falling 27% during the quarter.
One commodity-based segment that remains elevated is the energy sector. The impact of the US and Europe banning the import of Russian oil and gas has already been felt as the gap in supply saw the price of Brent crude climb above $120 a barrel. However, the potential impact of higher interest rates on economic growth led to concerns over demand for oil, pushing the price back down to $115 a barrel, still 7% higher compared to the end of the previous quarter. Despite the modest increase in the price of oil, stocks within the global energy sector declined during the quarter, as the MSCI All Country World Energy Index ended the period down 5%.
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