Joe Lawlor, Senior Associate, Investment Management Oversight, MJ Hudson: After years of near zero inflation, we saw an abrupt rise in prices caused by the lifting of pandemic restrictions in many countries, continued disruption to global supply chains and then, the Russian invasion of Ukraine. This marked the end of the era of easy money and Quantitative Easing as Central Banks, led by the Fed, started the long march back to historically more normal interest rate levels. Bond markets took fright with yields rising (posting negative returns @ -16% in USD) and credit spreads also widened.

This contagion also seeped through to equity markets with the MSCI Global Benchmark falling by 18% in USD terms as investors priced in higher rates and the probability of recession in 2023. The rising interest rate cycle also led to a vicious rotation in equity markets. The secular outperformance of Growth Stocks which has lasted for over a decade came to a sudden stop with global Value outperforming vs Growth by >20%. As the Fed moved first and fastest in hiking rates the USD appreciated across the board with gains of 8-10% against the euro, yen and sterling.

What happens next? If as seems likely, inflation is close to a peak and Central Banks have done most of the heavy lifting on monetary policy, 2023 should be more positive for asset markets. The dreaded term ‘soft landing’ may begin to be heard. Bond yields should trade in a narrow range and equity markets may trade higher as some of the pessimism around earnings forecasts disappears. However, if inflation proves sticky and Central Banks have to continue to tighten to drive inflation lower then asset markets may take fright and we could be in for a replay of 2022.