Financial assets endured a difficult quarter.  The war in Ukraine disrupted global energy and grain markets, pushing inflationary pressure up everywhere. US headline inflation rose to 9.1% in June. 10-year US Treasury yields hit a high of 3.5% in the quarter, rising from 1.5% at the end of last year.

Central banks’ expansionary monetary policy stance in the US, which was a response to the pandemic was totally inappropriate in the current environment and had to be reversed. Regulatory rates were raised twice and many more future hikes have been signaled. The Fed’s balance sheet will also be shrunk in the course of the year. These tightening measures are necessary course corrections needed to keep inflation in check, but financial assets valuations were pushed down as rates rose. With inflation eating away at the consumers’ spending power, and the Fed raising the cost of capital, the financial markets are also beginning to entertain the possibility of a recession down the road.

Chinese equities fared better in the quarter. Inflationary pressure was better contained in China giving PBOC the flexibility to provide some measure of easing, allowing a 25bps cut in the reserve requirement. Premier Li Keqiang calls for stability were widely interpreted by the market that the Chinese reforms aimed at the property and technology sector were abating. These, together with the re-opening of Beijing and Shanghai from the pandemic lockdown, allowed the Chinese equity market to recover some ground in the 2nd quarter.

In the quagmire of negativity, we would be remiss to ignore the most positive development in all these; the share prices of companies that hold the most promise for the future have been hit the hardest. Growth stocks, especially emerging ones, have fallen much more than the broader market. These are the leading players in cloud computing, artificial intelligence, autonomous driving, synthetic biology, and fintech but their share prices are the biggest collateral damage in the Fed’s fight against inflation.  The current valuation of these stocks has retreated and is now broadly on par with the staid consumer staple sector, a good indication that much of the hype, or excesses have been dealt with by the correction.

We will endeavor to live up to Warren Buffett’s famous quote, “Be fearful when others are greedy and greedy when others are fearful”.

June 2022