The year 2022 has been mostly negative for global equity markets with investors largely ignoring the headwinds. But with global markets reaching year-to-date lows, there is a shift in investor behaviour, says Wellington Management.

“I suspect that this “reawakening” may be about fears of larger macro and systemic risks that could rear their ugly heads as we get further away from the cosy low-interest-rate environment of the past decade-plus,” writes Gordon Lawrence, Director of Global Derivatives at Wellington Management.

The investment management firm says that while interest rate hikes are no surprise, the pace at which they are coming is exposing systemic fragilities. Wellington says that a similar magnitude of rate hikes was previously seen in the US in the early 1980s and then in 1994.

“Equity market participants are taking notice of the big-picture changes that appear to be brewing of late,” says Lawrence. The investment management firm says that sectors and individual stocks are moving in correlation, with evidence suggesting the first such correlation occurred after the US Fed’s initial rate hike earlier this year.

Volatility expectations have increased in global equity markets, and Wellington says that investors should expect sharper market swings in the months ahead. “Investors have begun to express concern that there may be more such changes to come. In that context, equity volatility may well stick around — and perhaps continue to rise — for a while longer,” says Lawrence.

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