From the pandemic to the ongoing Russia-Ukraine crisis, the world has witnessed quite a bit in terms of economic instability over the last two to three years. Financial and social turmoil has had a significant impact on investments, and investment managers have identified a dynamic change that is on board. Let’s look at how the investment outlook changed due to these recent global events and how they have impacted investments globally.
Change in interest rates and incline of inflation worldwide
wood cube block with percentage symbol icon. Interest rate, financial, ranking and mortgage rates concept
As the pandemic began in late 2019 or early 2020, most countries worldwide downsized their interest rates to an extremely low level, even close to zero in some places. Interest rates were supposed to go back up, but the Ukraine invasion happened. Now that a potential war is circling Europe, interest rates are far-fetched from rising back up in the near future.
However, a major fall in the economic activity in most parts of Europe has led to an expected weak economic growth and stagflation. There also exists an expectation of increased interest rates that would help the economies recover.
On the other hand, inflationary pressures after the plunge during the pandemic is still prevailing in Europe. Especially after people transitioned from working from office to home, they were provided with several government-based transfers that led to an increase in demand. This increase in demand and a disrupted supply chain, resulted in pressured ports and scarcity. The excess demand shot up the inflation rates to an unprecedented level. It was predicted that the inflation would lower once supply chains were readjusted and demands were fulfilled. However, the Ukraine invasion did not allow that to happen, and instead, inflation rose higher.
Since both Russia and Ukraine are major commodity suppliers, the supply chains are in deep shock with goods scarce across the globe. The prices of commodities like crude oil, wheat and natural gas are soaring with no momentum to come back down.
It is believed that inflation will rise even higher in 2022, and these levels will persist for longer than anticipated.
Confusion around bond yields and equities
Bond yields fell at the onset of the pandemic but rose back up in the middle of 2021. However, the Russia-Ukraine crisis has resulted in anti-normality in prices of the bond yields as they have fallen once again, making the situation all the more complicated. Since inflation is high, bond yields should be higher, but bond yields cannot really rise because the economy is weak. The overall sentiment around bond yields is still unknown, but it is most likely anticipated that the situation is said to remain weak in the coming months.
Equities, on the other hand, rising inflation and interest rates have not shown much of a positive impact either. The equities market is struggling to grow and has been on a downward swing for a few months now. Since there is no clarity about when interest rates are going to peak, holding onto equities as of now is uncertain. However, as growth resumes, there is an expectation that reduced interest will positively impact equity returns, which is why most investors believe that holding onto an equities portfolio is feasible in the long run.
Impacted investments globally in 2022
After the drop in investments due to the pandemic, investors expected a hearty return as things started coming back to normal and economies resumed. In fact, for a brief moment, investments started giving significant returns as well. This is where it was anticipated that the long run would seem fruitful and equities markets would strengthen.
However, the moment was short-lived as then happened the invasion of Ukraine. This attacked all investment expectations and created high uncertainty. The increasing interest rates and bond yields stooped to a much lower level again, whereas inflation continued to soar. There has been a significant shift towards the defence area due to the increase in government spending on defence.
However, sectors like technology and artificial intelligence are still alive with the hope of providing investors with positive returns and have been showing glimpses of good returns.
So, the actual conditions around investments are still uncertain as some sectors have dipped, but some have also emerged beyond expectations. The volatile events in Eastern Europe surely have a role to play and are sending investors into double thinking about investments and returns right now. It is definitely a concerning time for investors as investment opportunities have contracted, but all in all, history is witness to the prevailing equities market and how it emerges after every economic shock. Each falling market is supported by a rising one, and so the long-term outlook for investments should be on the positive side as markets have always picked up from where they left after such financial turmoil.
If you have concerns over how the recent economic events have impacted investments globally, then you can reach out to us to request an introduction and learn more about how financial advisers can guide you through this tricky time. Click the button below to learn more.
