Today’s global economies are seeking to integrate with new ways of doing business on the one hand, and with the general investment planning landscape that the world is currently witnessing on the other, as it has been negatively affected by the pandemic that has led to the dismantling of relationships between different asset classes.
Markets no longer follow the economic concepts of the university academic era, to turn the concepts of the game upside down, starting from US Treasury bond yields, to risky assets, including stocks and indices.
Despite the uproar caused by the central bank independence decision, it has generated many opinions regarding the natural rate of interest. While some argue that the same central bank signals are causing the drop in the natural rate of interest, others, in favor of this economic theory, stress the need to bypass exceptional central bank stimulus and adjust other economic parameters to keep pace with the new normal.
The events of 2021 came to prove the results of a wide range of hypotheses, as not only did risky assets such as indices and crypto rise, but even the dollar also showed excellent returns, as markets absorbed the next interest rate hike cycle surprisingly, led by the Reserve Bank US Federal Reserve.
Core inflation figures in the US are above their highest levels in decades. As is the case for other major producing economies, including Germany and China, core producer prices have reached very high levels. The lesson here is that this increase in inflation that we are witnessing today will not be temporary. Rather, it is likely that it will continue until the end of this year. The competent authorities are still confused about whether or not we will return to the 1970s from stagnation.
The main concern here is that in the case of a persistent inflation scenario, will final consumer income levels rise along with this vortex? It is likely that the governments of the Group of Four, which issue trillions of dollars through their investment in the form of what is known as US Treasury bonds, and other measures, to the deadly ghost that will haunt them for a long time.
The Chinese "Evergrande" crisis highlighted the risks that the internal system may face, which occur as a result of high financial leverage and uncontrolled financial spending rush.
As global central banks normalize interest rate levels and balance sheet size, the overall moderation in liquidity, compared to last year's high levels, often results in more bouts of risk selling; So investors are advised to stay away from unnecessary high-yield credits.
The energy crisis has also highlighted the impact of investments in the traditional fossil fuel sector, while the blame game on member countries of the OPEC+ group of oil producers and the alliance of 4 energy consuming countries (the United States, China, Japan and India) is likely to be Worse than a poker fight, so the need for sustainable investments in fossil fuels, including coal, crude oil and other derivatives, is urgent.
Nor can any complete transition toward a clean energy cycle come at the expense of the final consumer shelves paying more money than is needed.
With the widespread use of the “Blockchain”, in addition to the great planning to adopt this type of investment this year, the former skeptics quickly joined the digital transformation of currencies and went on to explain the benefits of using encryption and “Blockchain” technologies in daily life. While volatility will be the most prevalent factor for next year as well, cryptocurrencies as an investment asset class are likely to gain more adoption among major market forces. For example, major banking and financial firms will now feel the need to offer cryptocurrency so as not to miss the growing adoption curve.
With the Fed preparing to announce a rate hike sometime in the next year, that will be all the market's attention with an eye toward picking high-quality names in the investment field, including important US stocks.
With the breakdown of correlation across multiple asset classes, investors are advised to keep not only an appropriate mix of stocks and bonds in their portfolio, but also to seek safe havens and new emerging fads such as cryptocurrencies.
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| 2022 |
Investors today need to review their investments more frequently than ever, with the constant readiness for more bouts of volatility.
This article was written by : Vijay Valisha*
* Chief Investment Officer, Century Financial.
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