A look at the last quarter of 2022 and the end of a challenging year for investors.
Quarterly highlights include:
- Economic growth data in the US, Eurozone and UK, reported in Q4, exceeded expectations.
- Whilst GDP growth forecasts for 2023 continued to move lower in December, the pace of downgrades has eased in recent months. Nonetheless, high inflation and tighter monetary policy point to a very challenging growth outlook in 2023.
- Inflation data furthers the notion that that year-on-year inflation has passed its peak in the major advanced global economies.
- Though the major central banks followed the US Federal Reserve in shifting down to smaller 0.5% p.a. increases in December, they also stressed they were committed to keeping rates elevated for as long as required to control inflation.
- Despite a weaker end to the quarter, equities ended the period still in positive territory. Returns were particularly strong in Europe and the UK.
- Bonds mostly generated positive returns, with lower credit spreads boosting corporate debt especially.
- The US dollar weakened considerably against the pound as it became apparent that the worst of the Federal Reserve rate hikes were over.
Market Performance
| UK |
December |
Q422 |
2022 |
|
|
GLOBAL |
December |
Q422 |
2022 |
| UK |
-1.4 |
8.9 |
0.3 |
|
|
UK |
|
| GLOBAL |
-4.7 |
2.1 |
-7.3 |
|
|
Conventionalgilts |
-4.1 |
1.7 |
-23.8 |
| US |
-6.8 |
-0.5 |
-9.1 |
|
|
Index-linked gilts |
-5.1 |
-6.0 |
-33.6 |
| Dev. Europe ex UK |
-0.7 |
11.7 |
-7.8 |
|
Corporate |
-1.6 |
5.8 |
-17.6 |
| Japan |
-0.4 |
4.8 |
-4.8 |
|
|
GLOBAL |
|
| Dev. Asia ex Japan |
-1.9 |
8.0 |
-1.6 |
|
Investment grade |
-1.3 |
0.7 |
-12.6 |
| EmergingMarkets |
-1.8 |
0.7 |
-6.8 |
|
|
High Yield |
-0.7 |
4.2 |
-11.3 |
| Sterling v USdollar |
1.0 |
7.8 |
-11.2 |
|
Emerging market |
0.1 |
0.8 |
-7.9 |
Source: Morningstar. Percentage returns in sterling terms. All data as at 31/12/2022. Emerging market bond returns are acomposite of 50% hard currency and 50% local currency bonds.
Economic background
Economic growth data in the US, Eurozone and UK, reported in Q4, exceeded expectations. However, high inflation and tighter monetary policy are increasingly weighing on the outlook for consumers and businesses. As a result, recession in much of the G7 and Western Europe looks a near-certainty. Given its expensive energy, labour shortages, and reduced public services, the UK’s near-term growth prospects look particularly challenging. US forecasts point to a shallow recession in the first three quarters of 2023, but the current strength in US labour markets and consumer demand has prompted the US Federal Reserve (Fed) to stress that intertest rates could go – and remain – higher for longer.
Recent data indicates that inflation peaked in Europe in Q4 and is now well past its peak in the US. While forecasters are fairly confident that headline inflation will start to come down sharply over the next few quarters, they remain concerned about core inflation – which excludes volatile items such as energy and food. Falling goods inflation is giving way to rising services prices and wages are growing strongly on both sides of the Atlantic.
After a round of 0.75% p.a. interest rate rises at previous meetings, the major central banks followed the US Fed in shifting down to smaller 0.5% p.a. increases in December. This takes policy rates in the US, UK, and eurozone to 4.5% p.a., 3.5% p.a., and 2.0% p.a., respectively. While the major central banks unanimously agree further rate increases will be required to return inflation to target, they also appear to agree the pace of future increases will slow.
Equity markets
Despite falling in December, global equities rose 2.1% over the quarter in sterling terms. Without a significant fall in the value of the US dollar this would have been higher still. A fall in inflation and an easing of the worst fears around potential European gas shortages, and the economic impact that may have caused, led to an improvement in investor sentiment. The energy sector outperformed again amid record earnings reports. Industrials and basic materials, energy intensive sectors which had weakened on European energy supply concerns, outperformed too. Consumer discretionary stocks underperformed as the cost-of-living squeeze intensified and technology continued 2022’s underperformance as interest rates, and yields, rose (this sector is highly sensitive to both). Europe notably outperformed, while the UK also fared well owing to the waning concerns around potential gas shortages.
Developed market government and investment-grade corporate bonds
UK gilts rose over the quarter as the market continued to recover from the intense selling pressure seen in the wake of the “mini” budget at the end of September. UK 10-year yields ended the period at 3.7% p.a., 0.5% p.a. below end-September levels. Investment-grade credit spreads, or the additional yield received for investing in corporate over government bonds, fell which drove positive performance from corporate bonds (bond prices rise as credit spreads fall).
Alternative bonds
As with investment-grade bonds, high-yield credit spreads also fell, with prices rising. Global high-yield markets outperformed sterling markets, highlighting the higher risk premium investors are still assigning to the UK in credit markets and reinforcing the need for global diversification here.
Both local currency and US dollar-denominated emerging market bond prices rose over the quarter, although currency movements offset some of these gains, meaning returns were fairly flat where currency exposures were left unhedged.
Outlook
Despite a mild recovery to assets in the final quarter, 2022 has been a challenging year for investors. The economic picture for 2023 remains bleak, with most developed economies forecast to fall into recession in 2023. That doesn’t necessarily mean it will be a bad year for investors, however. The forward-looking mechanism that markets work on means that, because a recession is now the consensus view, a scenario where a recession is avoided or is very mild could boost equity markets.
Of course, central banks’ efforts to tame inflation are not over yet. Although there is broad consensus between central bankers and markets on how high interest rates will get and when we will reach that point, there are different views on when and how fast rates might start to come back down. The Federal Reserve in particular is trying to convince investors that rates will need to remain high for longer than investors expect (or want). Bond markets have repriced considerably over the past year and now offer attractive returns but there could be some headwinds if the Fed’s view of the world comes to fruition. In any case, long-term investors should be excited by the prospective returns on offer even if there may be more bumps on the road over the short term.
Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
Data & Commentary Source: Hymans Robertson 2022 Quarterly Commentary. This is market commentary and does not constitute financial advice.
A look at the last quarter of 2022 and the end of a challenging year for investors.
Quarterly highlights include:
Market Performance
Source: Morningstar. Percentage returns in sterling terms. All data as at 31/12/2022. Emerging market bond returns are acomposite of 50% hard currency and 50% local currency bonds.
Economic background
Economic growth data in the US, Eurozone and UK, reported in Q4, exceeded expectations. However, high inflation and tighter monetary policy are increasingly weighing on the outlook for consumers and businesses. As a result, recession in much of the G7 and Western Europe looks a near-certainty. Given its expensive energy, labour shortages, and reduced public services, the UK’s near-term growth prospects look particularly challenging. US forecasts point to a shallow recession in the first three quarters of 2023, but the current strength in US labour markets and consumer demand has prompted the US Federal Reserve (Fed) to stress that intertest rates could go – and remain – higher for longer.
Recent data indicates that inflation peaked in Europe in Q4 and is now well past its peak in the US. While forecasters are fairly confident that headline inflation will start to come down sharply over the next few quarters, they remain concerned about core inflation – which excludes volatile items such as energy and food. Falling goods inflation is giving way to rising services prices and wages are growing strongly on both sides of the Atlantic.
After a round of 0.75% p.a. interest rate rises at previous meetings, the major central banks followed the US Fed in shifting down to smaller 0.5% p.a. increases in December. This takes policy rates in the US, UK, and eurozone to 4.5% p.a., 3.5% p.a., and 2.0% p.a., respectively. While the major central banks unanimously agree further rate increases will be required to return inflation to target, they also appear to agree the pace of future increases will slow.
Equity markets
Despite falling in December, global equities rose 2.1% over the quarter in sterling terms. Without a significant fall in the value of the US dollar this would have been higher still. A fall in inflation and an easing of the worst fears around potential European gas shortages, and the economic impact that may have caused, led to an improvement in investor sentiment. The energy sector outperformed again amid record earnings reports. Industrials and basic materials, energy intensive sectors which had weakened on European energy supply concerns, outperformed too. Consumer discretionary stocks underperformed as the cost-of-living squeeze intensified and technology continued 2022’s underperformance as interest rates, and yields, rose (this sector is highly sensitive to both). Europe notably outperformed, while the UK also fared well owing to the waning concerns around potential gas shortages.
Developed market government and investment-grade corporate bonds
UK gilts rose over the quarter as the market continued to recover from the intense selling pressure seen in the wake of the “mini” budget at the end of September. UK 10-year yields ended the period at 3.7% p.a., 0.5% p.a. below end-September levels. Investment-grade credit spreads, or the additional yield received for investing in corporate over government bonds, fell which drove positive performance from corporate bonds (bond prices rise as credit spreads fall).
Alternative bonds
As with investment-grade bonds, high-yield credit spreads also fell, with prices rising. Global high-yield markets outperformed sterling markets, highlighting the higher risk premium investors are still assigning to the UK in credit markets and reinforcing the need for global diversification here.
Both local currency and US dollar-denominated emerging market bond prices rose over the quarter, although currency movements offset some of these gains, meaning returns were fairly flat where currency exposures were left unhedged.
Outlook
Despite a mild recovery to assets in the final quarter, 2022 has been a challenging year for investors. The economic picture for 2023 remains bleak, with most developed economies forecast to fall into recession in 2023. That doesn’t necessarily mean it will be a bad year for investors, however. The forward-looking mechanism that markets work on means that, because a recession is now the consensus view, a scenario where a recession is avoided or is very mild could boost equity markets.
Of course, central banks’ efforts to tame inflation are not over yet. Although there is broad consensus between central bankers and markets on how high interest rates will get and when we will reach that point, there are different views on when and how fast rates might start to come back down. The Federal Reserve in particular is trying to convince investors that rates will need to remain high for longer than investors expect (or want). Bond markets have repriced considerably over the past year and now offer attractive returns but there could be some headwinds if the Fed’s view of the world comes to fruition. In any case, long-term investors should be excited by the prospective returns on offer even if there may be more bumps on the road over the short term.
Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
Data & Commentary Source: Hymans Robertson 2022 Quarterly Commentary. This is market commentary and does not constitute financial advice.