However, should inflation surprise to the upside we can expect rate hike expectations to increase as well. The start of the tightening cycle will likely see the cash rate reach 1.5 per cent by the end of 2023, and end up at 2 per cent by mid-2024. Ultimately, regulators and central banks want a healthy credit market and will want to avoid shocking markets with excessive tightening of monetary policy relative to market expectations.

With rate hikes largely priced in, investors now turn to two key questions. Will economic growth in 2022 reach the market’s high consensus expectations, or will cyclical growth disappoint? Another key question is the pace at which the central bank will end its bond buying programme and the implications to liquidity and risk premiums.

The market has high expectations for global growth – almost double the trend rate for the past five years, leaving plenty of room to disappoint should growth normalise to become average.

Consumer confidence is already down due to high inflation and in the bond market, the yield curve is flattening, both of which could indicate disappointing growth could be around the corner.

Should central banks be forced to hike rates to manage inflation while growth lags expectations, it is likely to create more market volatility. Additionally, the Fed has indicated it is likely to phase out its bond buying programme at a quicker pace than in the past. We saw a preview of this in 2018, when the Fed raised rates closely followed by quantitative tightening, resulting in a 20 per cent market correction in equities and eventually a pivot back to easing in 2019.

This time, the Fed has indicated it will look to employ these monetary tools simultaneously. If we do see a slowing of central bank bond purchases in a slowing economy, this could lead to a fall in share prices as the market demands a higher risk return for stocks in such a period.

What does this mean for investors?

We have already started to see some volatility in equities, but this could just be the tip of the iceberg.

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A simple way investors can start positioning for further volatility is by focusing on low beta, defensive sectors within the market such as healthcare stocks, both locally and globally, consumer staples and non-cyclical technology sectors. A focus on quality balance sheets and earnings growth is also important. Downside hedging through the derivatives market, such as options, is also a highly effective and cost-efficient way of protecting against risk and volatility.

Finally, investors should always follow the golden rule – diversify. Hold a variety of assets, so your portfolio can continue to perform across the economic cycle, including in times of a slowdown.

The last three years have seen double-digit equity returns on the back of economic growth, coupled with rate cuts and central bank bond purchases that boosted liquidity. While the next 12 months could be a different story should economic growth miss market expectations, investors can take comfort in the fact that both the RBA and the Fed have committed to signalling policy changes in advance, leaving time to adjust portfolios when necessary.

However, by diversifying portfolios, including portfolio hedges and defensive sectors, investors can prepare themselves for the heightened uncertainty and what could be a volatile year ahead.

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

Peter Moussa is a senior investment specialist for Citi Australia.