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Stock markets: Four key trends that will impact share prices

With rising inflation taking hold across the globe, stock markets will continue to be affected by inflationary pressures. Photo: REUTERS/Andrew Kelly
With rising inflation taking hold across the globe, stock markets will continue to be affected by inflationary pressures. Photo: Andrew Kelly/Reuters

Global stock markets have had a rollercoaster ride since the outbreak of COVID-19 two years ago.

From the crash in March 2020, when the world went into lockdown, to a stellar tech rally, and from a meme stock frenzy to the reopening of the economy.

As the world moves back to some form of normality there are a number of themes that may counteract a positive return.

Aegon Asset Management has highlighted four challenges for performance in the equity markets in 2022:


UK inflation soared to a 30-year high of 5.4% in the year to December thanks to rising energy costs, strong demand for goods and services, and ongoing supply chain disruption.

Meanwhile, the consumer prices index in the eurozone rose at an annual rate of 5.1% in January, compared with 5% in December, according to Eurostat, the European Union’s statistics office.

In addition to this, it was revealed on Thursday that US consumer prices rose at their fastest pace since the early 1980s. Household prices were up 7.5% in the 12 months to January, according to data from the Labour Department.

Watch: What is inflation and why is it important?

With rising inflation taking hold across the globe, stock markets will continue to be affected by inflationary pressures.

Inflation is expected to remain high for the next few months, and then decline into year end. The European Central Bank (ECB) has constantly reiterated the belief that current inflation hikes are only temporary.

However, inflation remains an uncertainty, and markets hate uncertainty. Many of the pressures that allowed inflation to rise sharply could ease in the coming quarters, particularly as consumers move from goods to services.

“The surprise to the market could be that inflation recedes quicker than expected,” Stephen Jones, global CIO, multi assets solutions and equities, at Aegon Asset Management, said.

Read more: UK economy posts fastest growth since second world war

Central bank decisions

Central banks across the globe are tightening monetary policy and hiking interest rates in a bid to combat inflation and the rising cost of living. This is set to remain a major theme for financial markets over this year.

This month the Bank of England (BoE) doubled UK interest rates to 0.5% after it put rates up in December from record lows of 0.1% to 0.25%. It was the second increase since the start of the pandemic, and marked the first back-to-back hike since 2004.

The Bank also predicted that households were set to suffer the sharpest fall in living standards since records began three decades ago.

Due to this, it is expected that Threadneedle Street will tighten monetary policy again in the near future, with strong price pressures and further rises in inflation over the coming months a near-certainty.

Traders are betting on at least one 50 basis point increase by May, which would take the base rate to 1%.

Watch: Will interest rates stay low forever?

Jesús Cabra Guisasola, senior associate at Validus Risk Management, said: "The case for another rate hike from the BoE in March is already priced in by most market participants.

“Nevertheless, it will be important to observe by how much given there were four policymakers who wanted to act faster and voted for a 50bps hike during the February meeting to curb inflation expectations."

Meanwhile, a bigger-than-expected jump in US inflation in January has fanned expectations that the Federal Reserve will embark on a more aggressive campaign of monetary tightening.

“Key for investors will be how aggressively the US Federal Reserve tightens policy over the course of 2022,” Jones said.

“Post the most recent Federal Reserve meeting there is a reasonable probability of seven rate hikes this year as well as quantitative tightening, although this remains fluid.”

Global economic growth

Global growth is expected to decelerate in 2022, from 5.5% to 4.1%, according to the World Bank, due to the continued disruption caused by COVID-19, as well as supply bottlenecks.

Last month the International Monetary Fund (IMF) also warned that the global economy is entering 2022 “in a weaker position than previously expected” as it downgraded its outlook largely due to slower recoveries in the United States and China.

Read more: European stock markets slide despite UK economy posting strong growth

Although the global economy should continue to slowly rebound as the world recovers from the coronavirus pandemic, the pace of the expansion will differ by country and industry.

Equity markets have already seen the tech sector grow at pace in the last few years, while sectors such as travel, leisure, retail and hospitality suffered amid COVID strains, lockdowns and various restrictions.

The easing of supply chain disruptions will also have an effect on equity markets this year.

Aegon Asset Management said: “Production should be supported by employees returning to the workforce and this should help ease supply chain bottlenecks.

“However, governments played a major role in supporting demand over the last couple of years and the removal of this support will likely cause the pace of economic growth to ease.”

Geopolitical risks

IMF first deputy managing director Gita Gopinath warned in January that “rising geopolitical tensions and social unrest also pose risks to the [global] outlook.”

A potential invasion of Ukraine by Russia would hit a number of markets, including energy prices such as natural gas and oil, grains and wheat, the region’s sovereign dollar bonds and stock markets.

Although tensions between the two countries are likely to be a slow burn and not a full-blown conflict, the risks are on the rise.

Read more: Energy prices could rise further because of OPEC failures, warns IEA

Russia has repeatedly denied any plans to invade Ukraine, despite having more than 100,000 troops near the border, while it has begun military drills with neighbouring Belarus.

Ukraine has also accused Russia of blocking its access to the sea.

“If this risk abates this will remove an uncertainty for the markets, which would ease investors’ concerns,” Stephen Jones of Aegon Asset Management said.

“Our base case remains on no significant escalation in Eastern Ukraine in the near term but expect tensions to continue as troops and equipment continue to be moved. Ultimately the cost might be too high and the reward too doubtful for Russia to launch a full-blown invasion.”

Watch: Does Sunak's stance on inflation crisis lay bare a leadership ambition?