Global monetary policy under pressure

The month of April was the second-worst month on the stock market in almost 50 years. War, inflation, rising interest rates, concerns over a shortage of electricity, and concerns over a recession in particular have already led to many investors throwing in the towel. This, in turn, is putting monetary policy in a difficult position. What’s next? The implications for investors.

Monetary policy in crisis. How to drive the markets.

2022 got off to a bad start in terms of the capital markets. Firstly, the Russia-Ukraine war has created significant human suffering overnight, together with vast global economic and geopolitical challenges: Globalization is on the decline and the European Union is looking to redress its dependence on Russian gas as quickly as possible.

Secondly, the war has dissipated hopes of a rapid decline in inflation. This, in turn, has presented big central banks, especially the US Federal Reserve (Fed) and the European Central Bank (ECB), with a "prisoner's dilemma."1

Normally, you would expect monetary policy to be expansionary given the current headwinds. In this instance, there has been no choice but to take the opposite approach. After all, central banks cannot and do not want to appear idle in the face of record inflation figures. However, since the causes of inflation are largely beyond their control, a monetary policy contraction presents a very bitter medicine.

Investments are losing value

As if the poor start to the year was not enough, April 2022 proved to be the second-worst April overall for investors since 1976. The reason for this is not only the nosedive in stock markets, but also the simultaneous sell-out of bonds. Generally, losses in equities lead to price gains in bonds – and vice versa. This, in turn, creates diversification. Since 1976, this trend has proven accurate for the stock market for 84% of all months passed. The combined loss of equities and bonds has only been greater than last April on one occasion, back in May 1994.

April 2022 was a historically bad month for investments

Last data point: April 2022
Source: Bloomberg, Credit Suisse

Historical performance indicators and financial market scenarios are not reliable indicators of future performance. You cannot invest in an index. The index returns shown are not the results of the actual trading of investable assets/securities. Investors pursuing a strategy analogous to an index can achieve lower or higher returns, and have to take into account the associated costs.

Are interest rates only going to be rising temporarily?

In light of the negative developments discussed, is the outlook for the global economy currently looking as bleak as it did during the financial crisis of 2009? Without wanting to gloss over war, inflation, and rising interest rates – it seems unlikely. In the United States, for example, wages have recently seen a sharp increase, however, such patterns correct themselves – if wage pressures disengage employing companies, unemployment will rise again, and the previous wage pressures will decrease. This kind of development could certainly be seen again in the coming fall. It should be noted that rapid increases in inflation in particular have always been succeeded by equally rapid declines in the last century.

Rising interest rates: Inflation increases and decreases from 1921 to 2022

Last data point: March 2022
Source: Bureau of Labor Statistics, Yardeni Research, Credit Suisse
Note: The shaded bars indicate recessions in accordance with the National Bureau of Economic Research.

The verdict on investments: What investors need to know

If you want to navigate the current uncertain terrain correctly, you should take the following three points on board:

  1. This year, Credit Suisse House View's defensive strategic approach is evident. While a strategy that relies half on Swiss Confederation bonds and half on Swiss investments (SMI) has led to a decline of around 9% since the beginning of the year, the decline in balanced mandates has been on average a good 3% lower. Although such small discrepancies equate to great differences over several cycles – and affirm the value of good diversification.
  2. The unexpected rapid rise in interest rates and volatility has created an almost optimal environment for financial engineering, structured products, and a certain investment opportunism. The market is moving and offers active investors plenty of opportunities in equities, as well as currencies, bonds, and commodities.

    And the tried-and-tested rule applies: When volatility is high, it is usually worth selling – for example, through reverse convertibles. When volatility is low, it is usually worth buying – for example, with call and put options.
  3. The current political and economic mélange will lead to a new world order in which investors can best participate over long periods through thematic investments. In the long term, investments in supertrends such as climate change, digitalization, and infrastructure growth are likely to offer great opportunities. These are much cheaper to buy today than just a few weeks and months ago.

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