Equity markets ended June with significant declines. Appetite for risky assets continued to be affected by fears of significant rate hikes by Central Banks to combat inflation.

U.S. consumer prices rose 8.6% in annual comparison during May, a 40-year high, prompting the Federal Reserve to raise interest rates by 75 basis points at its June meeting. This was the largest increase since November 1994, bringing the rate to a range of 1.5-1.75%, and raising expectations of a rate hike to around 3.5% by the end of 2022.

The current environment, in which higher interest rates inhibit economic growth, demand and investment, has caused the consensus growth estimates for most countries to be adjusted downward for 2022: for example, the United States from 3.5% to 2%, Europe from 3.5% to 2.5%, England from 4% to 3.5% and China from 5.5% to 3%.

At Grupo Inversión, we believe that we are close to the highs of inflation and expect it to moderate towards the last quarter of the year. The latest economic indicators in the U.S., such as manufacturing, consumption, home sales, retail sales and consumer confidence, show some weakness; it is even possible that the U.S. economy has declined during the first half of the year. In addition, the effects on commodities such as oil, natural gas, wheat and corn caused by the Russia-Ukraine war seem to have reached their limit and are moving away from their highs. Finally, supply chains and bottlenecks are gradually being released, including at seaports, thus increasing production.

Recapping the semester, the S&P 500 dropped 20.58%, its worst performance since 1970 for the first six months of a year. Fixed income, on the other hand, moved in tandem with equity markets, showing positive correlation with them and accumulating declines of 10.35% during the same period. With this, a standard portfolio of 60% equities and 40% fixed income would have accumulated a negative return of 16.49% at the end of June, not seen since 1937.

Looking forward to a better second half of the year, Grupo Inversión decided to sell its positions in Europe and Japan to buy the equivalent in the Chinese stock market. Controlled inflation in that economy, coupled with reduced regulations and increased government stimulus, should prove to be a good catalyst for markets in that region.