2022 was supposed to be a big bounce-back recovery year for the global economy. It was 2022 after all, not “2020 too”, and the worst of the once-in-a-hundred-years “black swan” event was supposed to be in our collective rear-view mirror. Not quite, it turns out.

By the end of 2021, global financial markets were already dealing with rapidly rising inflation, led by commodity prices due to the reopening of the advanced economies, effectively the most vaccinated parts of the world, which in turn led to a surge in demand – READ: revenge spending.

This, however, chased a limited amount of goods as global supply chains were strangled by lockdowns, in particular those of China due to its zero-COVID policy.

Concerns over inflation bring into play a shift in central bank policies. The problem this time around is that US inflation wasn’t just rising; it was rocketing to 40-year highs, which meant that the US Fed had no choice but to signal a change, and possibly an abrupt one, in its ultra-accommodative monetary policy path.

This forced markets to recalibrate expectations, which complacently assumed historic low interest rates for longer, driving volatility in risk asset prices higher.

When Russia invaded Ukraine on the 24th of February, everything changed. The world was suddenly thrown into another unforeseeable global risk event. Overnight, uncertainties multiplied and turbulence in global financial markets shifted into overdrive.

Year-to-date, US equities are down 21%, with tech stocks leading the drop, while US bonds, particularly the benchmark 10-year US Treasury bonds, are down 7.2%. Closer to home, the peso has depreciated against the US dollar by 2.7% while the Philippine Stock Exchange index (PSEi), down 4.6%, seems directionless, as foreigners once again have steered clear. As a result, market liquidity has dried up.

With mounting risks and the broader global economic recovery facing significant headwinds, particularly from cripplingly high energy and food prices, markets have sold good assets together with not-as-good assets in a race to de-risk portfolios and head to safer ground.

Price dislocations, when the intrinsic value of an asset decouples from the price the asset is trading at, continue to happen.

Investors are right to feel jittery. No one likes standing on shaky ground, but as history has shown time and time again, for those with longer-term horizons, the best returns are realized by bargain-hunting when the market is in panic mode, when irrational price dislocations are at their highest. As Nathan Rothschild, an 18th-century financier, put it, “The time to buy is when there’s blood in the streets”, which he did after the Battle of Waterloo.

Successful investors, therefore, stay sober in times of market turbulence and uncertainty, keeping emotions in check. It is never an easy ask. It is challenging to understand the level of risk you are able to tolerate, and patiently scope for long-term investment opportunities by distinguishing between good resilient risk assets that have been oversold versus bad ones.

We must also recognize that not all crises are the same. This is not the déjà vu of the 2008 global financial crisis or much less the global health crisis of two years ago. It is very much 2022, not “2020 too”, and it is important to put in place the right investment strategies that fit the current risk environment.

RUBEN L. ZAMORA is the Head of Institutional Investors Coverage Division of Metrobank.

While the reopening of the economy gives a sense of optimism to many, food and fuel prices are rising. The latest inflation figure – the year-on-year change in the consumer price index (CPI) – was recorded at 4.9% in April 2022, almost 100 basis points (bps) higher than that in March. It is already beyond Bangko Sentral ng Pilipinas’ (BSP) target range of 2-4%.

The Philippine Statistics Authority (PSA) attributes this uptrend to accelerating food prices, energy prices, and transportation costs. But what exactly is driving the soaring prices?

As an investor, inflation matters because soaring prices mean costs will just escalate, and you will be able to purchase much less than before because your assets can’t keep up.

Recovering demand, revenge spending

COVID-19 changed the economic landscape in 2020. Governments implemented lockdowns to curb the virus, halting economic activity. Demand destruction ensued as people had to stay home and businesses had to shut down. With low demand, inflation slowed down. Philippine inflation for 2020 averaged at 2.6%, with the figures settling at a low 2% range in the height of ECQ-MECQ.

This changed in 2021 when COVID-19 cases started to fall, and vaccines started rolling out. Governments have begun to work their way towards recovery and to slowly reopen their respective economies. The reopening resuscitated the destroyed demand in 2020, and this was even reflected in the 2021 Philippine GDP growth of 5.7%. Some studies even pointed out that consumers were ready to engage in “revenge” spending, planning to spend more on retail shopping, discretionary spending, and other large purchases.

Higher consumer and investment spending are supposed to be good for the economy, right? Not if the supply can’t catch up to support such spending, which leads to higher prices.

Supply crunch and geopolitical tensions

Despite the renewed drive to spend, global supply chain issues and geopolitical tensions threaten to buckle the global economic recovery through higher prices. For one, COVID-19 is still present and surges in the number of cases have prompted some countries to reimpose mobility restrictions, which can disrupt the flow of goods across the world.

Even if there is demand, if there are fewer goods coming through, prices will increase. Recently, China reimposed lockdowns due to their zero-COVID policy, halting the flow of goods through their ports and thereby disrupting global supply chains.

Importantly, the recent rise in prices is partly exacerbated by the ongoing war between Russia and Ukraine. While the Philippines is not directly involved, the country bears the brunt of higher fuel costs and, consequently, higher commodity prices since food and other essential goods are now more costly to transport across the country.

The economic sanctions imposed by the West on Russia in response to its invasion of Ukraine have constrained the supply of oil across the world. Russia produces about 11% of the world’s total oil, and the expected reduction in oil supply drove crude oil prices to as high as USD 130/barrel.

This explains why domestic gasoline and fuel prices have reached about PHP 70-P80 per liter. Furthermore, it appears that this higher fuel cost will stay for as long as the West does not lift the sanctions even if Russia halts the war against Ukraine.

With demand continuously picking up amid constrained supply, prices are expected to soar further. The BSP, which can slow down inflation by hiking interest rates, has so far favored non-monetary policy measures (such as fuel subsidies) to cushion the effect of higher fuel prices especially in the transport sector. It has also maintained its 2% key rate in favor of sustained demand expansion. Currently, markets are expecting the BSP to start hiking rates, perhaps as early as June 2022.

(In part 2, we shall talk about inflation forecasts and why they are updated every so often. For investors, it is imperative to have at least some projection on how fast prices will go.)

RENZ CALUB is the Deputy Head, Research and Business Analytics Department, of Metrobank.