a) As most economies around the world are emerging from the height of the COVID pandemic in 2020, their stock markets have also largely recovered to their pre-pandemic levels. However, the recoveries vary across countries. For example, the Standard and Poor (S&P) 500 stock index, a broad measure for the US stock market, exhibits an increase from 3,380 in February 2020, prior to the start of the pandemic, to 3,901 by the end of October 2022. A return of 15% over the period. In contrast, the ASX 200, an Australian stock market index, shows a decrease from 7,139 to 6,786, or a loss of 5.2%, over the same period. Discuss factors in these two markets that might drive the difference in their performance.
b) Many economies are currently experiencing high inflation rates after recovering from the COVID pandemic in 2020. For example, the US records the latest annualised inflation rate of 9.1% during the June quarter 2022, the highest in three decades. Similarly, Australia recently experiences a record high inflation rate of 7.3% in October 2022. There are several factors that contribute to the rise in inflation. They include stronger demands for goods and services after the recovery, increases in energy costs, and bottlenecks in global supply chains. From an investor’s perspective, discuss whether stocks and bonds are a good hedge against higher inflation. Among stocks, what characteristics (or types) of stocks are preferable in the presence of higher inflation?