The cause of this sudden shift is also equally clear – rising inflation. The big question is whether the monetary authorities will be able to put the inflation genie back in the bottle without causing too much economic pain. As we have stated before, higher inflation leads to lower equity returns. See for example the chart below. When inflation is high (between 4 and 8%) equity markets do more poorly. Take for example over 12 months. Normally the S&P 500 would be expected to return around 9% (blue bar). Higher inflation reduces this by almost half to 4.9% (red bar).
Source: Strategas Research Partners
A more detailed discussion of the difficulties facing the authorities in combatting inflation is available in our full blog.
In summary – we still maintain a constructive outlook for equities returns in 2022, but recognise that risks are increasing. We are certainly not making an outright bearish call on equities, and our portfolios remain strongly positioned for the new environment with our strong value bias at both the geographical and sector level.