The economic scenario at the dawn of 2022 has rarely been so opaque. Retail investors have to ask tough questions to which there don’t seem to be clear answers.

The new normal is that today’s financial markets are characterized by a lack of clarity, unknown risks, and no guarantees that expert forecasts are more reliable than others.

Over the past two years, central banks have flooded the world’s economies with huge amounts of money. This strategy has helped many economies avoid deep lows. Yet the collateral damage is rapid inflation which can quickly destroy personal wealth.

Central bankers no longer focus on containing inflation as they did until a few years ago. They even change their minds very quickly trying to calm nervous markets and, at the same time, act as effective watchdogs against skyrocketing inflation.

Today, many agree that inflation is not as “transient” as central bankers believed just a few months ago. Monetary policy will also not solve the problem of rising inflation, the dynamics of which are quite complex today.

For those with a less conservative risk appetite, stocks are generally a better hedge against skyrocketing inflation than bonds. But that comes with a lot of caveats. The prices of US and European stocks may already be quite high.

If economic growth stalls due to Omicron and delayed structural reforms, stock prices could take a hit. This risk becomes more threatening if central banks start raising interest rates and withdrawing COVID support programs too soon.

The local stock market remains too shallow and dominated by very few publicly traded companies to offer the comfort of a strategy based on diversification. The European and US equity markets may offer better diversification opportunities for small retail investors.

The local bond market presents even more challenges for local investors. Local banks’ credit risk appetite is now much more conservative than ever. This has prompted some high-risk companies to resort to issuing bonds which admittedly pay more than bank deposits, but carry considerable risks for inexperienced investors.

Most of the credit risk has shifted from the banking sector to the less regulated corporate debt and capital markets in recent years. This is not a good thing for retail investors who may find the pricing of risk difficult to understand.

The new normal is that today’s financial markets are characterized by a lack of clarity, unknown risks, and no guarantees that expert forecasts are more reliable than others.

The yield on high quality global bonds that are not linked to an inflation index can turn negative if inflation continues to grow at a rapid rate. Even if we are a far cry from the hyperinflation scenario experienced in the 1970s, bond investors with little tolerance for risk could suffer a major blow to their kitty.

Those interested in emerging markets must ask even more difficult questions. Growing geopolitical tensions and supply chain change strategies could mean that investments in technology, education and real estate companies in China could suffer serious declines.

Many investors channel their money into the financial markets through institutional asset managers and insurance companies. This can save these investors from worrying unduly about monitoring market trends, believing that the experts can do a better job. This is often a good strategy. Still, there is a caveat.

Some asset managers try to beat the low returns that debt and some equity markets have offered in recent years by diversifying part of their collective investment schemes into riskier assets. In recent years, private debt has attracted substantial interest from institutional investors. Still, the higher returns it could potentially bring at a cost: less liquidity and price volatility.

Investors have their own risk tolerance levels. Small retail investors should seek professional advice if they do not understand the risk implications of specific financial instruments. Many may not tolerate even a marginal loss on their capital, even if the cost of sticking to a low risk strategy is a meager return.

Regulators and sellers of financial investment products owe a duty of care to all investors, but even more so to small retail investors. These investors may not understand that earning a 4% yield on a lower quality bond, when banks pay much less than that on a term deposit, carries significant risk.

This duty of care is not limited to including lengthy legal narratives of the inherent risks associated with specific bond issues. In 2022, the caveat emptor principle – which the buyer beware – does not exempt regulators and debt issuers from effectively protecting small investors.

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