Review & Outlook

June 2022

The economic situation continued to deteriorate in the second quarter, most notably as the prospect of an imminent end to the war in Ukraine receded. This is impacting on the prices of many commodities such as energy and foods, pushing global inflation rates ever higher.

Central banks have now started to raise interest rates in an attempt to counter inflationary pressures and, in the case of the Swiss National Bank, so as to have a stronger Swiss franc make imports cheaper. Higher interest rates are also pushing down consumption, thereby curbing price rises.

Most of the price pressures stem from the short supply of energy and commodities (especially foods) from crisis-hit areas. It is not surprising, therefore, that consumer sentiment in Europe and the US has worsened dramatically. Global economic growth has continued to weaken in recent months and many places are now expected to enter recession as soon as next year. One particular cause of concern is Europe’s energy supply in light of the coming winter.

The sanctions imposed by western countries on Russia have so far proven to have a powerful boomerang effect, as Russia can now use commodity markets as a means of applying pressure on the West.

The risk of a downward spiral in the global economy may well mean that central banks are not fully able to push through the aggressive rate hikes they have announced and sooner or later have to stimulate the economy again.

The economic downturn has exacerbated the unsustainably high level of debt within the global economy. The US is likely to run a federal deficit of more than 2 trillion US dollars again this year and government debt will therefore rise to over 125% of annual gross domestic product! A large proportion of the deficit stems from debt service costs, another reason why governments can ill afford significantly higher interest rates. Unfortunately, the situation in Europe looks no better and the prospect of a sustained conflict with Russia does not bode well for indebtedness in the near term.

On the financial markets, all asset classes except gold fell sharply in the first half of the year. Unfortunately, our portfolios were unable to buck this trend. In these uncertain times, we are maintaining our broad spread of high-quality investments. Alongside increased liquidity, we are also focusing on precious metals investments, which protect against high inflation rates.

Over the past few days, we have seen increasing signs that price pressures have eased slightly in several sectors of the economy. It is quite possible that we have more or less reached peak inflation and the pressure on markets may subside somewhat. A lot of negative news is no doubt already priced into current valuations, which makes us slightly more upbeat about the path forward in the second half of the year.

We remain on the ball and wish you and your family a nice, quiet summer.

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