Inflation at its peak? Steering an optimum course through turbulent markets.

Inflation is likely to peak soon

In the first half of 2022, market sentiment deteriorated with a variety of factors involved. Partly because global growth has weakened significantly, mainly due to the Russia–Ukraine war and China’s lockdowns.

And partly because rising energy prices and aggravated supply chain problems have also ramped up the pressure on prices. Accordingly, annual inflation rates have reached record highs in all major economies. However, inflation is approaching its peak, according to analysts at Credit Suisse. While prices will probably remain high, the price rate of change is unlikely to maintain its current pace. Inflation is expected to fall again by 2023.

Volatility in the markets continues

The elevated volatility that has characterized global markets so far this year shows no signs of easing. Concerns about not only persistently high inflation but also economic growth, monetary policy tightening as well as the geopolitical situation continue to weigh on investors’ minds. Not surprisingly, the year-to-date performance of different major asset classes is quite disillusioning.

However, a rebound in industrial production growth is likely as China reopens its manufacturing economy in Q3, but this may offer limited relief. The underlying growth in the global goods sector will likely soften due to a shift toward services spending, elevated energy costs, and tightening financial conditions. A healthy labor market and excess household savings should further drive services consumption.

How investors can withstand market volatility

Rising inflation means that both equity and bond markets struggle, challenging the traditional diversification between equities and bonds. Volatility remains elevated and there could be further sharp market moves in the weeks and months ahead – both upwards and downwards. Leaving financial markets now and holding cash would mean a guaranteed loss of purchasing power given inflation rates. Panic sales during the current market trough are therefore not advisable.

One way to deal with high volatility is to broaden portfolio diversification beyond equities and bonds. Alternative investments such as private equity, hedge funds, and commodities have held up much better than stocks and bonds this year. Including those asset classes in a portfolio where appropriate can help to mitigate overall risk and improve return potential.

When uncertainty is high, it often helps to take a longer-term perspective. Thematic investment approaches like our just updated Supertrends framework provide valuable guidance about investment opportunities for the longer term.