For financial professionals in Belgium

Emergent issues steering a volatile market

Justin Tugman, CFA

Justin Tugman, CFA

Portfolio Manager, Team Leader

1 Aug 2022
5 minute read

During a volatile first half of the year, several key issues have risen to the surface. How these factors evolve will likely guide the direction of markets.

Key Takeaways

  • The volatility that we have witnessed this year is driven by uncertainty around several key issues in the market.
  • Specifically, the geopolitical fallout from the Russia-Ukraine war, the Federal Reserve’s (Fed) policy course to tame inflation, and a broader global shift away from easy central bank policy will be central to determining where markets go from here.
  • As the situation evolves, investors may be wise to manage downside risk with an eye toward using ongoing volatility to seek long-term opportunities.

Following a tumultuous first half of the year, it has become clear to us that several emergent issues will likely influence the course of markets going forward. For one, the fallout from Russia’s invasion of Ukraine in February will have lasting economic effects, as commodity-rich Russia is a key supplier of natural resources.

What is the West’s pain threshold for Russian sanctions?

How stringent Western nations will remain with sanctions will depend ultimately on how much pain these economies are willing to endure as key resources are choked off. Most prominently, Russia produces roughly 10 million barrels per day of oil. If large oil service companies are barred from working in Russia, it would be a challenge to keep up the current rate of oil production. Declining production would increase the pressure for other oil-producing nations to fill the gap ‒ no small task given the challenges of the Organization of the Petroleum Exporting Countries (OPEC) and limited investment to expand production in the U.S.

While oil is most conspicuous, Russia is a key source for other commodities as well, including industrial metals such as aluminum, steel and also nickel, which is a critical material for electric vehicle (EV) batteries. Given a concerted push to increase EV production, its importance has only increased, and any shutdown of commodity supply from Russia runs the risk of putting additional cost pressure on manufacturing.

Europe is enormously dependent on natural gas from Russia. If these countries choose to shun Russian natural gas, it’s unlikely they can fully replace the shortfall using other sources. Liquefied natural gas (LNG) prices would likely be bid up as they secure as much supply as possible from other countries, resulting in higher natural gas prices globally. Russia and Ukraine are also leading exporters of grains such as wheat and corn, and fertilizer materials such as potash and phosphates. While it’s unlikely that there will be Western sanctions on agricultural commodities, the disruption to these supplies as a result of the war has the potential to significantly affect food security, crop yields and prices going forward.

How hawkish will the Fed be?

We have seen a recent pullback in commodities prices and some modest improvement in supply chains; however, the Fed will likely need to raise rates further to get inflation closer to its target of 2%. This makes for a difficult balancing act, and the potential for a “soft landing” has become less likely, in our opinion. It remains to be seen whether a potential recession would be short or prolonged, shallow or deep, but past Fed efforts to contain inflation have often led to a recession. However, we don’t believe this potential is fully reflected in either corporate earnings estimates or current valuations, and additional downward revisions may further unsettle the market as investors await clarity on the outlook for inflation, interest rates and economic growth.

Will tighter financial conditions drive a market rotation?

Following the Global Financial Crisis, central banks around the world maintained consistently dovish bents, leading to a period over the past decade-plus of low interest rates, low inflation (indeed, often with fears of deflation) and easy central bank policies. These factors helped to fuel enormous gains in the stock market, including high valuation areas and money-losing companies or those with weak balance sheets. We are now very likely in the reverse of that period, with rising interest rates, inflation levels well above central bank targets and less accommodative central bank policies all leading to a tightening of financial conditions globally.

In the unwinding of those longstanding easy-money policies, there is a risk that the “fuel” for markets is gone, causing a more significant pullback than we’ve grown accustomed to. This has already been seen in some high-multiple, money-losing stocks. Given the significant multiple expansion we’ve seen over the past decade, there could be more downside ahead, not only for those names but for the broader market as well. A day of reckoning may well be in store for non-earning companies and those with significant debt on their balance sheets as financing gets scarcer and more expensive.

This year, we have seen uncertainty around key issues drive a shift in market leadership as investors process the changing environment. Amid the volatility, investors may be wise to consider quality, reasonably valued companies with strong balance sheets and healthy cash flows, with an eye to managing downside risk. As the dust settles and the situation evolves, long-term opportunities may present themselves to those who are observant and patient.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.


Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.


The information in this article does not qualify as an investment recommendation.


Marketing Communication.






Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Capital Funds Plc is a UCITS established under Irish law, with segregated liability between funds. Investors are warned that they should only make their investments based on the most recent Prospectus which contains information about fees, expenses and risks, which is available from all distributors and paying/facilities agents, it should be read carefully. This is a marketing communication. Please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions. The rate of return may vary and the principal value of an investment will fluctuate due to market and foreign exchange movements. Shares, if redeemed, may be worth more or less than their original cost. This is not a solicitation for the sale of shares and nothing herein is intended to amount to investment advice. Janus Henderson Investors Europe S.A. may decide to terminate the marketing arrangements of this Collective Investment Scheme in accordance with the appropriate regulation.
    Specific risks
  • Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • The Fund invests in real estate investment trusts (REITs) and other companies or funds engaged in property investment, which involve risks above those associated with investing directly in property. In particular, REITs may be subject to less strict regulation than the Fund itself and may experience greater volatility than their underlying assets.
  • The Fund may use derivatives to help achieve its investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses to the Fund may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
  • When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.