Investing for changing inflationary dynamics

With COVID-19 moving from pandemic to endemic status, 2022 was supposed to play out quite differently. However, repeated COVID outbreaks in China and Russia’s invasion of Ukraine stoked inflation and markets have scrambled to reprice risk.

Panorama 01 Jul 2022 3 min read
Barry Gill
Head of Investments

Key highlights

  • What is causing inflation in 2022? While there were already significant inflationary dynamics at play, COVID outbreaks in China and Russia’s invasion of Ukraine have exposed the fragility of the global trade system and stoked inflation.
  • The S&P 500 formally entered a bear market, and bonds and stocks started to positively correlate for the first time in over 20 years.
  • Will central banks react aggressively and tip the global economy into recession?


Market impact of Russian escalation in Ukraine

Ukraine/Russia Macro update

2022 was supposed to play out quite differently: COVID-19 was moving from pandemic to endemic status, allowing countries and citizens around the world to travel and socialize more freely. Some of the cyclical inflation effects were set to wane as supply chains normalized.

Companies should have been able to plan ahead, possibly igniting a merger wave. This combination of factors was going to bring a potential cycle-ending final boom of growth and optimism. It should have been a good time for risk assets, with credit spreads staying tight and equities continuing to move upwards.

Unfortunately, none of this materialized. Repeated COVID-19 outbreaks in China kept supply chains in a mess; Russia instigated an armed conflict in Ukraine which exposed the fragility of a global trade system we have generally taken for granted. These factors cemented the inflationary dynamics that were already at play.

Optimism has been replaced with pessimism, and emerging clarity fudged by new-found uncertainty. The confidence that central bankers felt with respect to the transience of inflation has given way to a sense that they are behind the curve in taming the inflationary dragon.

How durable will these inflationary pressures be and will central bankers accidentally tip the global economy into recession?

Markets and investors have scrambled to reprice risk, particularly in the growthier areas of technology disruption. The S&P 500 formally entered a bear market, and bonds and stocks started to positively correlate for the first time in over 20 years. The primary questions investors are trying to answer now concern the durability of the inflationary pressures and whether central bankers in their zeal accidentally tip the global economy into recession.

The focus of our mid-year Panorama is squarely on what happens if inflation becomes a persistent problem. We open with a discussion I recently had with Manoj Pradhan, Chief Economist at Talking Heads Macro. Manoj has written an excellent book arguing for the return of structural inflation.

The theme is further explored in the context of asset allocation – what does structural inflation mean for equity and bond investors? And what does it mean for sustainable investing adoption given the new focus on returns from ‘brown’ industries that have been excluded from many environmental, social and governance (ESG) mandates.

Alternatives clearly have a role to play as a portfolio diversifier, given both equity and bond beta is in retreat – our Hedge Funds Solutions team and our Real Estate and Private Markets team explore the potential opportunities and benefits of these allocations if inflation endures.

Please enjoy this mid-year edition of Panorama and as always, please reach out to your trusted UBS Asset Management partner for any further advice.


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Mid-year outlook 2022

With inflation reaching multi-decade highs in many parts of the world, how can investors position their portfolios for this changing investment landscape?

About the author
  • Barry Gill

    Head of Investments

    Years of investment industry experience: 29

    Education: B. Commerce (Intl) with German from University College Dublin

    Barry Gill was appointed Head of Investments in November 2019 and is a member of the Asset Management Executive Committee.

    He was Head of Active Equities within UBS Asset Management from early 2016 and, before that, joined O’Connor in 2012 as a member of the management group where he ran a concentrated long/short strategy.

    Prior to joining O’Connor, Barry was head of the Fundamental Investment Group (Americas) for nearly six years within UBS Investment Bank, investing and trading the firm's principal capital.

    Barry moved to the US in 2000 from London to rebuild the long / short principal investing effort within Equities following the creation of O’Connor as a hedge fund business.

    In his five years in London at SBC and UBS, he was co-head of Pan-European Sector Trading, a proprietary book, and co-head of European Risk Program Trading for two years, preceded by two years as the head of the French trading book. Barry joined SBC's European derivatives desk as a graduate trainee in 1995.

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