Volatility is a measure of the ferocity of the market's changes — violent fluctuations mean high volatility. Much like frantically shaking a fruit tree at its trunk until it relinquishes its ripened goods, investors can be shaken loose of their ASX shares during times of market volatility.
Uncertainty created by COVID-19 has yet to subside, but there are new potential causes of volatility that could unseat COVID.
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Will inflation put a dent in ASX shares next year?
As we move towards the end of another year, investors begin to shift their sights to what lies ahead. For AXA Investment Managers chief investment officer Chris Iggo, it marks the realisation there might be other market disruptions than just COVID for the S&P/ASX 200 Index (ASX: XJO) and its constituents.
According to Iggo, the unknowns associated with COVID-19 will likely still linger as a worry for investors. However, the elephant in the room of financial markets is expected to be inflation.
After policymakers around the world looked to contain the economic damage of the pandemic through stimulus and loose monetary policy, the repercussion could manifest itself in the form of higher than expected inflation. Central banks would need to steer the economy in the other direction by potentially raising interest rates.
On this topic, Chris Iggo outlined what scenario investors might be confronted with in 2022:
Looking to 2022, investors need to contemplate a number of issues over the likely trajectory of inflation, whether central banks will need to do more than what is already priced in, and how portfolios should be adapted to hedge against a worse outcome. That worse outcome would be even higher inflation, a more aggressive tightening of monetary policies and a subsequent downgrade to growth prospects.
For Iggo, the risk lies in the Federal Reserve conceding its terminal policy rate to be higher than 2.5%. This would likely boost long-term bond yields substantially higher. In turn, growth investments such as ASX shares would look less attractive.
The verdict
While the risk exists, Iggo and the team at AXA Investment Managers are doubtful of a catastrophe for ASX shares. The fund manager expects a slight increase in rates, in conjunction with a 'little' easing in earnings growth. All in all, the fund's outlook is described as "hardly the stuff of bear markets".
There are still tailwinds Iggo references that could counter the possible headwinds ahead in 2022.
Iggo said:
Ongoing recovery, innovation around climate change and re-purposing supply chains should be strong tailwinds for equity investors for some time.
So far this year the benchmark index has gained 10.5% before dividends. This surpasses the average total return of 9.3% over the past 10 years.
