The financial rollercoaster has investors reeling: is the “great rebalancing” here?

The financial rollercoaster has investors reeling: is the “great rebalancing” here?

Abhishek Datta is the associate vice president at the Continental Group, an insurance intermediary and financial services solution provider in the GCC. 

The year 2022 was difficult for even the most savvy investors. It was marked by a confused mixture of market forces, policy moves by Central Banks, and, to some extent, the hangover of the easy-money regime that prevailed over the last decade.

Across the developing world, both bonds and stocks witnessed a significant downturn. That upended the conventional 60:40 portfolio intended to reduce volatility and protect portfolio values. In fact, even gold, despite its time-tested hedging capability, did not appreciate as anticipated in the calendar year. 

The zero-interest regime, coupled with quantitative easing, undertaken to alleviate the economic fallout from the pandemic, unleashed a financial rollercoaster. The subsequent uneven rebound in economic activity gave rise to inflationary pressures, which necessitated interest rate hikes. As a result, some stocks that had thus far witnessed stratospheric growth due to low rates nosedived quickly. Throughout 2022, successive interest rate hikes and tightening money supply had a negative impact on stock market returns.

Factors like “sticky inflation”, followed by one of the fastest interest rate hikes, reverberated through the markets. Generally, high rates discourage individuals and institutions from borrowing to scale and grow their ventures, eventually leading to slower economic growth. However, the impact isn’t uniform across the board. Strategic dollar-cost averaging has still made investing in markets attractive in the long term. Meanwhile, this unprecedented phase, punctuated by shifting geopolitical winds, has been positive for several GCC countries.

War and its zero-sum economics

The fragile state of a globalised economic world was highlighted by the Russian invasion of Ukraine. Initially, the knock-on impact was on the energy and food sectors, as critical supply lines were disrupted. The deficit snowballed into retail inflation, with costs passing on to customers. The retail inflation in the UAE verged on about 5 per cent in 2022. If anything, such cascade effects reinforced the need for alternative sources and diversification. 

Though the Russia-Ukraine conflict gave investors exposed to the energy sector a windfall (S&P 500’s top performer of 2022 with a 58 per cent year-on-year spike), it came at the expense of many others. The war had a strange impact on many economies reeling from uncontrolled inflation — such as Turkey, where Borsa Istanbul gained 103 per cent in dollars fuelled by local investors pumping money into equities in search of returns and companies boosting their profits despite the economic hardships. 

Crypto crumbles in times of crisis

Blockchain-based virtual currencies, dubbed “digital gold” for their hedging capability by virtue of induced scarcity, exposed their structural flaws in 2022. Years of meteoric growth, fuelled by inherent qualities such as immutable ledger and transactability, came crashing down as the noose of "red tape" began to tighten globally. Safe to say that, with the downfall of reputable exchanges such as FTX, cryptocurrencies have a long and bumpy road to resurgence. 

Financial rebalancing impacting startup investments

Even the startup scene has not been unaffected by market developments. Startups have seen markdowns across the board in their valuations. For example, valuations in the Indian startup scene have declined, with serious markdowns for darlings like Byju's, PharmEasy, Oyo, and Ola, to name a few. Keeping up with excessive cash burn in a significantly higher-interest-rate regime during an economic slowdown is proving to be difficult for a lot of them.

The Softbank group lost about $32 billion in its Vision funds for the year ending March 2023. It is planning layoffs of about 30 per cent of the staff as fresh fund flows dropped to about 10 per cent compared to last year. However, there is still interest in investments in the AI space, with Softbank keen on deploying capital into Generative AI. Layoffs are the new normal for tech firms. According to consulting firm Challenger, Gray & Christmas Inc., the tech industry announced job cuts of 97,171 employees in 2022, which is the highest since the dot-com crash.

The startup funding situation in the Middle East and North Africa, too, has been par for the course. Mena startups recorded $919 million in equity financing from January–May 2023. The corresponding figure for 2022 stood at $1.45 billion according to Wamda. The number of deals, too, reduced significantly year-on-year, from 378 to 181 in 2023. The considerable shortfall is consistent with the ongoing “funding winter” globally. 

Whims of asset classes in 2022

The New York Times, at the tail-end of 2022, published an article titled ‘Chamath Palihapitiya, the “SPAC King”, is over it’. It signalled the nadir of the SPAC market after rising interest rates rendered the practice of blank-check companies showing faux profits untenable. Needless to say, many sponsors of SPAC companies raked in significant returns during the peak pandemic, just as many lost their capital to short squeezing in 2022. Likewise, the ESG segment, which saw an upturn following the heightened awareness of sustainability in 2021, witnessed a lull as investments plunged by 76 per cent globally. The purported risk-mitigation element of ESG funds was thus called into question. 

A defining moment in the financial markets in 2022 was the bursting of the “meme stock” bubble. The frenzy, which had culminated in the creation of a dedicated “meme stock” index in the yesteryear, died down as many ETFs tracking a basket of such stocks plummeted noticeably through 2022 with each passing interest-rate hike. For investors, it was a reality check on structural vulnerabilities and the sustainability of speculative assets. Both equity and fixed-income ETFs saw a muted performance but showed glimpses of promise, especially in nascent markets such as the Middle East. 

All in all, the year 2022 offered investors a steep learning curve. It underscored how geopolitical faultlines have a direct bearing on ROI while reinforcing the need to balance externalities such as deglobalisation and the energy crisis with financial fundamentals. In other words, it upheld the rebalancing imperative in investments, echoing how strategic exposure to different asset classes and geographies is a prerequisite to wealth preservation and management. 

From the Middle East and Africa’s standpoint, the year 2022 was about maximising the virtues of geopolitical non-partisanship by negotiating favourable terms in trade deals linked to domestic prices and inflation. At a time when financial markets are highly sensitive to geopolitical winds, MEA benefitted significantly by resisting the urge to cosy up to certain “blocs”. Such foundations will allow regional investors to build failure-proof portfolios in the times to come. 


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