Q2 2022 Review: High Inflation Rates and Slowing Economic Growth

Key Takeaways

Due to the current economic phenomenon of stagflation, characterised by high inflation rates and slowing economic growth, equities and bonds were under pressure in the second quarter, as investors moved to price in further interest rate hikes and an increased risk of a recession. Inflation continued to move higher in many major economies during the quarter, as both the US and the EU registered a rate of 8.6%. Among equities, the MSCI Value index outperformed the MSCI World Growth index but both saw sharp falls of 16.2% and 21.2%, respectively. Chinese shares proved a bright spot, as prolonged lockdowns due to Covid-19, were lifted in some major cities.

United States

US equities fell most notably in the media & entertainment and auto sectors. On the other hand, consumer staples and utilities were comparatively resilient. During this quarter investor’s focus was mainly trained on inflation and the policy response from the Fed, where a  rate hike of 0.75% was enacted, targeting a rate of 1.5% to 1.75%. The central bank admitted that, the task of bringing inflation down whilst trying to keep unemployment under control, without triggering a recession, would be challenging.


Eurozone shares saw further steep declines, as the war in Ukraine continued and concerns mounted over potential gas shortages. Higher inflation is also denting consumer confidence, as expectations of higher rates in the Eurozone gained further momentum. Top performing sectors for this quarter included energy and communication services while information technology and real estate experienced sharp falls. Concerns over higher cost of living and the possibility of a recession, saw the European Commission’s consumer confidence reading fall to -23.6 in June. This marked  the lowest level since the early stages of the pandemic in April 2020. Continued disruption to gas supplies due to the war in Ukraine saw Germany move to phase two of its emergency energy plan. The next phase would involve rationing gas to industrial users, and potentially households as well. A flash estimate from Eurostat signaled inflation at 8.6% in June, up from 8.1% in May, with energy the biggest contributor to the rise.

Global Bonds

Global bonds continued to sell off sharply, with yields markedly higher due to elevated inflation data, hawkish central banks and rising interest rates. Bonds rallied towards the end of the second quarter, as a result of rising growth concerns, slightly curtailing the negative returns. European yields were volatile, as the central bank indicated it would end asset purchases early in the third quarter and raise rates soon after. The Bank of England implemented further rate hikes, bringing the total to five in the current cycle, raising its inflation forecast to 11%. The UK 10-year yield increased from 1.61% to 2.24% and the two-year yield rose from 1.36% to 1.88%.

Emerging markets

Emerging market equities declined, with US dollar strength a key headwind. This was despite outperforming developed market peers by a wide margin. The emerging European markets of Poland and Hungary both underperformed by a wide margin, as geopolitical risks stemming from Russia’s invasion of Ukraine persisted. The central banks in both countries increased the pace of policy tightening, while the Hungarian government announced windfall taxes on banks and other large private companies.

South Korea and Taiwan lagged as the outlook for global trade deteriorated. Conversely, China was the only emerging market to generate a positive return over the quarter. Lockdown measures in certain cities were eased and macroeconomic indicators began to pick up. Meanwhile, additional economic support measures were announced. The authorities also outlined a significant reduction in quarantine for close contacts and visitors to China, which should help to ease supply issues even if the zero-Covid policy seems set to remain in place.

Asian equities (excluding Japan)

Asian equities (excluding Japan) registered a negative return in the second quarter. Investor sentiment turned increasingly downbeat amid concerns that rising global inflation and ongoing supply chain problems, accentuated by the war in Ukraine, could tip the world into recession. South Korea was the worst performing market in the MSCI Asia ex Japan index, with financials, technology and energy stocks particularly badly hit amid fears of a global recession. Stocks in Taiwan were also significantly lower on fears that rising inflation and global supply chain problems would weaken demand for its technology products. China was the only index market to end the quarter in positive territory, as Covid-19 lockdown measures started to be relaxed. Investor sentiment towards the country was also boosted after government data showed that factory activity in China grew in June.

Local Market

In the local market, the MSE Equity Index gained 2%. This performance was the outcome of eight positive movers, mainly driven by Bank of Valletta plc (20.8%), Malta International Airport plc (5.3%) and International Hotel Investments (3.3%). On the other hand, 22 equities performed negatively during the period, with the worst performers including; Harvest Technology plc (-18.7%), Loqus Holdings plc (-18%) and FIMBank plc (-16%). HSBC Bank Malta plc moved in the opposite direction of Bank of Valletta plc as it declined by 7.8%.

In the fixed income market, the MSE Corporate Bonds Total Return Index closed 0.9% higher while the MSE Malta Government Stock Index dropped by -9.5%.


Article Sources: Schroders Insights and Malta Stock Exchange

This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]