Global equity markets resumed their slide this week as investors fretted about the impact of faltering economic growth.
The UK’s FTSE 100 Index closed down 1.82% on Thursday while the pan-European Euro Stoxx 50 fell 1.36% following a brutal sell off on US equity markets on Wednesday that saw the S&P 500 tumble 4%, its biggest one-day decline since the June 2020, wiping off about $1.5tn in valuation. Hong Kong’s Hang Seng Index closed down 2.54% on Thursday.
Underscoring the sell-off are concerns that inflation is squeezing global growth, amid growing evidence that higher prices are undermining retail spending and adding to supply chain costs.
“Stagflation fears continue to mount, with investors piling into cash positions as the global growth outlook plunges. Cash hoarding has reached the highest level since September 2001, indicating strong bearish sentiment among investors,” says Louise Dudley, portfolio manager, global equities, Federated Hermes Limited.
“This was a typical bear market rally: the rebound in risk sentiment proved fragile and the buyers rapidly disappeared at the first sign of stress. Retailers and other consumer and cyclical names were particularly weak as the reality of prolonged high levels of inflation set in,” Dudley says.
The focus of many investors has swung from concerns about inflation to fears about slowing growth, says Silvia Dall’Angelo, senior economist, Federated Hermes. US Federal Reserve chair Jerome Powell affirmed the central bank’s commitment this week to keep raising borrowing costs even if this causes a slowdown.
“The market now acknowledges that a soft landing is an unlikely development, as it will be hard for central banks to calibrate a policy response that addresses high inflation without killing the economic expansion,” Dall’Angelo says.
Economic activity in China contracted sharply in April as the implementation of strict Covid-19 lockdowns across the country hampered business activity, causing the most significant challenge to growth in the world’s second largest economy since the start of the pandemic in 2020.
Figure 1: Economic activity in China collapsed in April
Source: Refinitiv Datastream
China is now unlikely to achieve its growth target of 5.5% this year, with most forecasters now expecting growth of about 4% on the back of significant policy stimulus in the coming quarters.
“While protracted supply chain disruptions have proved inflationary at a global level, a sharp slowdown in Chinese demand would weigh on energy and metal prices globally, and the weakening yuan should also exert downward pressure on inflation globally,” Dall’Angelo adds.
Many investors are also concerned that the inflationary environment will cause consumers to rein in spending, causing further risks in consumer-exposed sectors which aren’t being fully priced in yet, says James Rutherford, head of European equities, Federated Hermes. “Inflationary pressure on company margins is also a growing – and underestimated – risk. We therefore remain focused on companies with high revenue visibility and strong pricing power,” he says.
Dudley adds: “As macro-economic concerns stemming from aggressive monetary tightening, the Russia-Ukraine conflict and China’s stringent Covid lockdowns persist, we anticipate continued volatility in the market. Maintaining a diversified portfolio will be crucial to navigating these turbulent market conditions.”