2022 – the year investors want to forget
Overall 2022 had been one of the worst periods on record for investors with many asset classes in the red and the typical asset class correlations breaking down (2022 was one of only three years in the past century where equities and bonds fell at the same time, 1931 and 1969 being the other two years, both of which presaged periods of higher inflation and economic volatility). Multi asset portfolios had very few places to hide and in December many thought the markets still had more rough waters to navigate in the next 12 – 24 months.
Performance chart showing total return performance of major global indices over the 2022 calendar year.
Global equity markets faced numerous challenges throughout 2022 including rising interest rates, inflation and threats of a looming global recession. The combination of conditions saw global equity markets post significant losses in US dollar terms. Global markets saw their worst year since 2008 in local currency terms.
At the latter end of 2021, many believed the inflation we were experiencing was ‘transitionary’, fuelled by pressures of global supply chain disruption that first started to appear after Covid, but this inflation became much more problematic and prolonged by the escalation of Russian aggression in Ukraine in February 2022. The tightening of monetary policy across the globe in order to try to control inflation saw sharp increases in interest rates over the course of the year.
The result of rising interest rates saw traditional higher growth areas such as technology stocks experience sharp sell-offs and when inflation really started to bite, more companies came under pressure. Energy and Commodity holdings were two of the few strong sectors as prices rose on the back of strong demand and weaker supply.
Currency movements also had a notable impact with the US dollar being pushed higher against the world’s other main currencies thanks to the Federal Reserve’s early and aggressive approach to raising interest rates in comparison to other central banks.
As well as being a difficult year for equity markets, 2022 was also a terrible year for most fixed income investors with the same causes such as rising inflation, higher interest rates, the impact of Covid as well as soaring government debt.
In the UK, the then Chancellor Kwasi-Kwarteng’s unfunded mini-budget threw the Gilt market into crisis in which a fire sale followed and gilt yields soared to levels not seen since the global financial crisis of 2008 while Sterling fell to an all-time low. It took a Bank of England intervention to buy £65 billion of longer dated gilts to bring relief to the market and help protect the UK pension industry against a ‘doom loop’.
What’s in store for 2023?
We don’t have a crystal ball here at Fairey Associates and when looking back at the last two to three years, it really is a futile exercise trying to predict what is in store for investors with precision.
In December, the forecast by most fund houses was gloomy for 2023 and the first draft of this outlook reflected the concerns of the fund managers however we move forward four weeks and already there are signs that the worst case scenarios forecast in December may now be looking more unlikely.
Inflation
The consensus seems to be that there are early indicators that inflation has peaked for many regions. That said, inflation is still likely to remain elevated above the Central Banks’ inflation targets for some time to come as there is usually a timelag for labour market and wage growth pressures to start to fall.
Interest Rates
In order to talk about inflation we have to look at interest rates too. The fund houses all agree that it is highly probable that Central banks still have more increases to make in order to combat the high inflation environment however, the views on how high these will go and when the rate rises are frozen seem to be softening. Some believe that this could be as early as Q1 of 2023 whereas others have forecast it will be closer to the end of the year. It all depends on how quickly inflation starts to fall.
Recession
In December, the general consensus was that there would be a global recession in 2023 however some market commentators are now suggesting that although we will see a global slowdown in growth, recession may occur in localised regions only and may not be as prolonged as initially forecast by the majority.
Outlook for 2023
We’ve seen a swing of sentiment within the fund houses’ views within the space of four to six weeks with many of the most hawkish commentators seeming more optimistic about the prospects for 2023.
Overall, the outlook for returns are muted for global equities and it is important to expect continued volatility as developed markets move into a new stage of the economic cycle. That said, fixed interest investments are looking more optimistic with yields now offering an income for the first time in years however quality will remain key for this asset class.
It is also important to remember that as investors, we’ve experienced difficult market conditions before and we still believe that time in the market (rather than trying to time the market) continues to be the best strategy for longer term returns. We remain confident in the ‘quality’ investment strategies by our active fund managers and stick by our belief that asset allocation and diversification is key to manage portfolio risk and returns.
Overall 2022 had been one of the worst periods on record for investors with many asset classes in the red and the typical asset class correlations breaking down (2022 was one of only three years in the past century where equities and bonds fell at the same time, 1931 and 1969 being the other two years, both of which presaged periods of higher inflation and economic volatility). Multi asset portfolios had very few places to hide and in December many thought the markets still had more rough waters to navigate in the next 12 – 24 months.
Performance chart showing total return performance of major global indices over the 2022 calendar year.
Global equity markets faced numerous challenges throughout 2022 including rising interest rates, inflation and threats of a looming global recession. The combination of conditions saw global equity markets post significant losses in US dollar terms. Global markets saw their worst year since 2008 in local currency terms.
At the latter end of 2021, many believed the inflation we were experiencing was ‘transitionary’, fuelled by pressures of global supply chain disruption that first started to appear after Covid, but this inflation became much more problematic and prolonged by the escalation of Russian aggression in Ukraine in February 2022. The tightening of monetary policy across the globe in order to try to control inflation saw sharp increases in interest rates over the course of the year.
The result of rising interest rates saw traditional higher growth areas such as technology stocks experience sharp sell-offs and when inflation really started to bite, more companies came under pressure. Energy and Commodity holdings were two of the few strong sectors as prices rose on the back of strong demand and weaker supply.
Currency movements also had a notable impact with the US dollar being pushed higher against the world’s other main currencies thanks to the Federal Reserve’s early and aggressive approach to raising interest rates in comparison to other central banks.
As well as being a difficult year for equity markets, 2022 was also a terrible year for most fixed income investors with the same causes such as rising inflation, higher interest rates, the impact of Covid as well as soaring government debt.
In the UK, the then Chancellor Kwasi-Kwarteng’s unfunded mini-budget threw the Gilt market into crisis in which a fire sale followed and gilt yields soared to levels not seen since the global financial crisis of 2008 while Sterling fell to an all-time low. It took a Bank of England intervention to buy £65 billion of longer dated gilts to bring relief to the market and help protect the UK pension industry against a ‘doom loop’.
What’s in store for 2023?
We don’t have a crystal ball here at Fairey Associates and when looking back at the last two to three years, it really is a futile exercise trying to predict what is in store for investors with precision.
In December, the forecast by most fund houses was gloomy for 2023 and the first draft of this outlook reflected the concerns of the fund managers however we move forward four weeks and already there are signs that the worst case scenarios forecast in December may now be looking more unlikely.
Inflation
The consensus seems to be that there are early indicators that inflation has peaked for many regions. That said, inflation is still likely to remain elevated above the Central Banks’ inflation targets for some time to come as there is usually a timelag for labour market and wage growth pressures to start to fall.
Interest Rates
In order to talk about inflation we have to look at interest rates too. The fund houses all agree that it is highly probable that Central banks still have more increases to make in order to combat the high inflation environment however, the views on how high these will go and when the rate rises are frozen seem to be softening. Some believe that this could be as early as Q1 of 2023 whereas others have forecast it will be closer to the end of the year. It all depends on how quickly inflation starts to fall.
Recession
In December, the general consensus was that there would be a global recession in 2023 however some market commentators are now suggesting that although we will see a global slowdown in growth, recession may occur in localised regions only and may not be as prolonged as initially forecast by the majority.
Outlook for 2023
We’ve seen a swing of sentiment within the fund houses’ views within the space of four to six weeks with many of the most hawkish commentators seeming more optimistic about the prospects for 2023.
Overall, the outlook for returns are muted for global equities and it is important to expect continued volatility as developed markets move into a new stage of the economic cycle. That said, fixed interest investments are looking more optimistic with yields now offering an income for the first time in years however quality will remain key for this asset class.
It is also important to remember that as investors, we’ve experienced difficult market conditions before and we still believe that time in the market (rather than trying to time the market) continues to be the best strategy for longer term returns. We remain confident in the ‘quality’ investment strategies by our active fund managers and stick by our belief that asset allocation and diversification is key to manage portfolio risk and returns.
