2022 was an eventful and extremely challenging year, and one that most long-term investors will want to forget (as such we will keep this review short). The main underlying culprit for the disappointing equity and bonds market returns last year was high and rising inflation. This led central banks around the world to raise interest rates sharply and in doing so put downward pressure on almost all asset classes.
The year started with a significant shift in narrative by central banks – from a position that high inflation was purely transitory to concern that high inflation risked becoming embedded. This about-turn ultimately led to a tightening in monetary policy with the US Federal Reserve (Fed) raising its target interest rate for the first time since the pandemic. However, Russia’s invasion of Ukraine towards the end of February was unquestionably the main story of the first quarter. While Russia is not a very large part of the global economy, Russia is a major energy and commodity producer (Ukraine is also a sizeable exporter of wheat and sunflower oil). The escalation of tensions pushed energy and commodity prices to extreme levels, exacerbating the surge in inflation caused by supply chain disruptions as a result of the pandemic, and acting as a risk to global growth; especially given the dependency of Europe on Russian gas and oil.
With Q2 came more concerns around inflation. At already elevated levels, any hopes of more transitory pressures were completely quashed as high energy costs, rising wages and broader input prices took hold. Coupled with supply side shocks in the form of localised China lockdowns (thanks to a zero-COVID-19 approach and questionable vaccination programme) and, of course, the continued impact of the Russian invasion of Ukraine.
Q3 initially started well with July proving to be a very good month for markets. Somewhat paradoxically, it was concerns over global growth (and increasing recessionary fears) that helped to provide support to risk assets, as slower growth expectations helped to temper the extremely high interest rate expectations. In a sense ‘bad news’ on the economy was ‘good news’ for markets. Sentiment then changed in the second half of the third quarter when focus shifted to the further deterioration of Europe’s energy situation (with record high electricity prices in most countries), higher-than-expected US inflation numbers, even more hawkish central bank rhetoric, and a farcical ‘mini-budget’ in the UK. In terms of the latter, markets unsurprisingly questioned the unfunded nature of the wide-ranging tax cuts, on top of the previously announced government financed freeze in energy bills. This led to upward pressure on bond yields, a sharp fall in sterling, and an increased probability that the Bank of England would have to raise interest rates substantially. A broad market sell-off of UK listed assets ensued, made worse by the adverse reaction in some UK pension funds when long-dated bond yields jumped higher.
With the exception of a weak December, the final quarter of the year proved to be very good for markets. Sentiment was supported mainly by a decline in expectations for interest rate increases, with speculation that central banks (specifically the Fed) would start to ‘pivot’, become less hawkish and start to slow the pace of rate increases as inflation showed signs of peaking. The restoration of some stability in the UK government, with Rishi Sunak replacing Liz Truss as prime minister, and a greater emphasis placed on fiscal prudence also assisted in stabilising markets, especially UK government bond markets. Warm weather in Europe helped to reduce natural gas demand, alleviating some pressure on governments looking to stockpile ahead of winter. Another positive for the markets stemmed from China, where official announcements seemed to suggest that it was moving away from its zero-COVID strategy, despite paradoxically seeing a recent surge in case numbers.
In truth it has been a particularly horrible year for market returns, with both risk assets and more traditional defensive assets (such as government bonds) being negatively impacted by events. Equities fell sharply with global equity markets down -16.0% over the year, although it could have been much worse if not for a strong final quarter. Market weakness was broad-based in 2022, with US (-19.8%) and emerging markets (-15.5%) down the most. Only the UK (+7.1%) was able to buck the negative trend and produce gains, in local currency terms. However, this mainly reflected the higher exposure to energy stocks in the index, with energy (+34.4%) the only sector to produce a positive return last year. Defensive sectors such as utilities (-3.8%), healthcare (-5.7%) and consumer staples (-6.0%), outperformed on a relative basis. At the other end of the spectrum communication services (-35.3%), information technology (-30.9%) and real estate (-24.0%) stocks were the weakest areas. In terms of style, value stocks (-6.9%) significantly outperformed the more interest rate sensitive growth stocks (-28.5%) in 2022.
Unfortunately, unlike normal risk-off situations, there was no place to hide within ‘safe-haven’ fixed income markets, as concerns over higher central bank interest rates and inflation meant both government bonds and high-quality credit fell sharply over the period. Global bonds markets ended the year down in the region of -11%, not far off equity declines for the year! Looking at the detail, global government bond prices fell by -10.0% (UK government bonds fell a staggering -24%!) on higher interest rate expectations, as did global investment grade credit falling -14.0%. At the ‘riskier’ end of the credit spectrum, global emerging market debt (-16.5%) and global high yield (-11.4%) were also weak during the year, but notably not as much as some of the more interest rate sensitive bond markets.
Real assets, such as listed property securities fell sharply, especially when compared with equities over the year, with the global REITs index down -23.6%, due to the combination of higher interest rates and slower economic growth expectations. Listed infrastructure (-6.5%) was also not immune to the general market sell-off but its more defensive qualities meant it outperformed on a relative basis. Commodities (+16.1%) were really the only bright spot in terms of return last year, however, even these masked big divergences in the underlying subsector performance. Crude oil (+24.9%) and agricultural prices (+15.5%) rose strongly on the back of supply concerns because of the Russia / Ukraine war. In comparison, industrial metals (-2.4%) fell on the back of global demand concerns, while at the same time gold (-0.7%) was weak because of a very strong US dollar and higher interest rate expectations.
| INDEX | END NOVEMBER VALUE | END DECEMBER VALUE |
| FTSE 100 | 7573.05 | 7451.74 |
| DJ Ind. Average | 34589.77 | 33147.25 |
| S&P Composite | 4080.11 | 3839.5 |
| Nasdaq 100 | 12030.06 | 10939.76 |
| Nikkei | 27968.99 | 26094.5 |
| £/$ | 1.2058 | 1.2083 |
| €/£ | 0.86303 | 0.88534 |
| €/$ | 1.0406 | 1.0705 |
| £ Base Rate | 3.00 | 3.5 |
| Brent Crude | 86.97 | 85.91 |
| Gold | 1768.52 | 1824.02 |
This month’s values quoted as at 30/12/2022. The above values are sourced from Bloomberg and are quoted in the relevant currency.
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Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rates also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned here may not be suitable, and is included for information only and is not a recommendation. You should always seek professional advice before making any investment decisions.
Based in the London office, Simon was appointed to the role of senior investment analyst in 2012, focusing primarily on fund research and portfolio management for Nedgroup Investments, a sister company of Nedbank Private Wealth. Simon has 20 years of industry experience in asset management and is a Chartered Financial Analyst.
Prior to joining the firm, Simon worked as a senior investment analyst at XL Group, a global insurance and reinsurance company, within its investment management division. Further experience includes working at UBS Investment Bank within their economic research department as an economist and strategist, focusing on emerging European markets.
Based in the London office, Simon was appointed to the role of senior investment analyst in 2012, focusing primarily on fund research and portfolio management for Nedgroup Investments, a sister company of Nedbank Private Wealth. Simon has 20 years of industry experience in asset management and is a Chartered Financial Analyst.
Prior to joining the firm, Simon worked as a senior investment analyst at XL Group, a global insurance and reinsurance company, within its investment management division. Further experience includes working at UBS Investment Bank within their economic research department as an economist and strategist, focusing on emerging European markets.
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