We are halfway (plus a couple of weeks in) through the year and what a tumultuous ride it has been for the global markets. Russia's invasion of Ukraine supercharged what was already fast-rising inflation, forcing major central banks to raise interest rates.
Add this to the onset of the crypto winter (bitcoin has lost half of its value this year) and what is shaping up to be a sustained commodities rally. The result? An 18 trillion dollar wipe out in world stocks (half of this coming from the US markets).
At the same time, 10-year US Treasury bonds - the benchmark of global borrowing markets and the traditional go-to asset in times of troubled times for global asset managers - have had their worst rise ever in 12 months.
New data published by the World Federation of Exchanges (WFE) now shows even private firms got scared of the dismal performance; number of initial public offers (IPOs) and the capital raised through IPOs decreased relative to H2 2021 (-52 percent and -62 percent, respectively), and to H1 2021 (-48 percent and -65 percent, respectively).
Closer home, the MSCI Frontier Markets Africa decreased by 14.46 percent while the MSCI Kenya Index fared worse with a 18.78 percent drop.
Furthermore, the potent strength in the dollar has seen it rise against a basket of the main world currencies in the first half. Overall, it was pretty much the perfect storm. The big question is what's in store in the next half?
Tough to answer but we can glean some useful clues from where most investors are presently focussing on: interest rates and by association inflation. Obviously, the world's most influential central banks don’t look like they are going to be pausing hiking rates anytime soon.
Since March, the US Fed has raised its benchmark policy rate 2.25 percentage points and is poised to do the same this September in a bid to contain stubborn inflation. Similarly, the Bank of England, which raised its rates by 50 basis points early this month, is on the path to hike again.
Likewise, the European Central Bank has signalled further increases (it first raised its deposit rates in July) to come later in the year. Historically, when these majors raise their interest rates, borrowing costs go up and international investors pull out money from the riskier parts of the world.
Emerging and frontier stocks are the first to see their stocks fall. Notably, private equity funds operating in the region have also already adjusted their pricing accordingly.
Against this backdrop, it’s safe to assume the erosion in the economic outlook and market confidence may still have further to go. But are these good reasons to stay away from the markets? A big No.
Despite the awful start this year and severe damage to confidence this is the most opportune time for investors to make an entry.
Perhaps this is the best time to apply the contrarian wisdom of Baron Rothschild, the 18th Century British nobleman and member of the Rothschild banking family, who is credited with saying, “the time to buy is when there’s blood in the streets, even if the blood is your own.”