The Big Think
Making sense of investment cycles
By David Crosoer , Chief Investments Officer at PPS Investments
It is often said that when investing , it is more important to focus on long-term trends and not become preoccupied with short-term fluctuations . What are the current issues that influence markets and what should one take note of as part of an investment strategy ?
As a multi-manager , the critical questions for us to ask — regardless of what the economic environment is we are operating in — are whether interest rates , inflation and economic growth are likely to be structurally higher or lower than we have assumed in the past . These questions are important because they will impact both our long-term strategic asset allocation to the various asset classes , as well as whether tactically we are receiving sufficient compensation to overweight or underweight a particular asset class .
For example , equity markets have been under considerable selling pressure in 2022 as investors anticipate that stubbornly high inflation will cause central banks to raise short-term interest rates multiple times this year . At the same time , expectations for global economic growth have been revised downwards , following further disruptions to global supply chains on the back of Russia ’ s invasion of Ukraine and China ’ s strict COVID-19 lockdown measures .
Currently , financial markets are pricing in substantial short-term interest rate increases from central banks ( the South African Reserve Bank ( SARB ) this year is expected to hike by 0.5 % a further six times after May and the US Federal Reserve ( Fed ) four times ), but these rate hikes are coming from multi-decade low starting points and markets have not really revised their longterm expectations upwardly for the neutral short-term interest rates of around 2.5 % for the Fed and 7.5 % for the SARB .
Long-term inflation expectations today are still similar to what they have averaged since 2000 . The International Monetary Fund ( IMF ) forecasts that developed market inflation may be back below 2 % per annum by 2024 ( it has averaged 1.9 % since 2000 ). When it comes to South Africa , the IMF is not expecting local inflation to exceed 6 % per annum over its forecast period ( it has averaged 5.5 % since 2000 ).
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