The final quarter of 2022 saw some light at the end of the tunnel with signs of inflation beginning to trend lower. However, despite this sigh of relief, central banks and policy makers retained a hawkish stance whilst slowing down the rate of interest rate rises. As mentioned in previous blog posts, 2022 is likely to be remembered as the year of transition. In 2021 not many would have expected central banks to manage 2022 in the way they did, however the year’s actions saw an end to the era of low inflation and near-zero interest rates. The war in Ukraine, as well as the supply chain issues, further exacerbated the transition away from the previous era. Global markets saw interest rates take off and inflation continue to move upwards. As a result, we saw a repricing of asset classes whereby both equities and bonds experienced double-digit declines, ultimately resulting in the toughest year for multi-asset investors in over 50 years.
Q4 Index Performance
The chart above shows the global performance of the world’s major financial indices over the past quarter. This provides an indication of how global markets have behaved. The chart shows that whilst the quarter started with another round of volatility, the improving inflation figures had a positive impact on global equity markets with all regions experiencing a positive return for the quarter. We see Europe recovered strongly during the quarter, finishing with a rise of close to 13% in the final quarter. The UK and US experienced similar journeys, starting the quarter with heightened volatility, but clearly experiencing some relief through improved inflation figures and finishing the quarter with 8.90% and 7.42% returns respectively.
Emerging markets and Asia also experienced a positive journey through the quarter, albeit with a slightly lower return for the quarter. The Nikkei in particular experienced a second round of volatility towards the end of the year though was still able to finish the quarter in positive territory.
Inflation remains a concern
Historically, global market sell-offs have been due to concerns around economic growth, however during 2022 it was inflation that caused global markets to go into a sell down. The surging inflation rate caused central banks to react fast with steep rate rises which, in turn, resulted in the spike in volatility we all endured throughout 2022. However, rather encouragingly we have seen year-on-year inflation decrease from 8.2% to 7.1% between October and December in the US, with 6.7% forecast in January 2023. We also enjoyed a slight drop in inflation in the Eurozone and the UK which provided a glimmer of hope that inflation may have finally peaked. After four 0.75% interest rate rises, the federal reserve finally reduced to a 0.5% rise in December whilst reducing GDP expectations in 2023 to 0.5%. Fed Chair Jerome Powell noted that there were still ‘ways to go’, but acknowledged that certain contributing factors of inflation had started to come down. With an interest rate rise of 0.25% for February now confirmed, this represents half the most recent rate rise. With these expectations in place, global markets can have a far greater understanding of where interest rates could end up, which in turn provides greater clarity on how to value different assets. This clarity was missing throughout 2022.
China relaxes COVID-19 Policy
China’s zero-COVID-19 policy has had material effects on global supply and demand over the past couple of years. Developments in this space took priority above all other areas of Asia for the final quarter of 2022. China finally made the decision to adopt policies closer in line to the rest of the world, accepting a reluctant coexistence with COVID-19 going forward. This decision to open up the economy will free up some movement in the country which, in turn, is likely to boost demand. Markets reacted positively to the news of China’s reopening, reflected in positive movements in Asia’s stock markets but also providing a more promising outlook in finally reaching a post-COVID world.
Policymakers continue to juggle
Closer to home in the UK and Eurozone, Central Banks have been dealing with more than just the threat of rising inflation; but doing so with economies which are already on the brink of recession. In November, the Bank of England announced we are likely to already be in a recession despite seeing economic growth rebound in October’s figures after a September decline – it is expected that the UK will experience negative economic growth for the second quarter, taking it into a technical recession. As a response to witnessing the US 0.50% interest rate hike, the European Central Bank stated that rate hikes and quantitative easing are likely to continue whilst policymakers improve the outlook for inflation. Whilst this may seem gloomy, we must remind ourselves of the severity of the warnings we faced for a tough autumn and winter. Thankfully, those months have been milder than previous warnings had implied – this has also been helped by the increased importing of liquid natural gas and higher gas storage levels. The Eurozone economy, whilst continuing to have weak indicators, has given a positive surprise over the winter.
In the UK, uncertainty around the UK’s political leadership has started to become the norm. The UK debt market has faced tough challenges throughout the year but UK equities primarily performed well last year despite the economic challenges faced within the country. The FTSE 100 is one of the only indices to end the year in positive territory, though this is largely due to the influence certain cyclical companies, miners and energy stocks have on the index, as well as a large contribution from foreign returns as a result of a depreciation of the British pound.
FCFP Portfolio Performance
The chart above shows the performance of our FCFP portfolios during the final quarter of 2022 against the UK-based FTSE-All Share (used as a point of reference only). The FTSE All Share, being purely UK-based and reflecting 100% equity exposure, reflects a more volatile experience, as expected, compared to all three FCFP strategies, which are invested globally and adopt more diversified, risk-aligned investment strategies.
Longer term performance
To provide context against longer term data, the chart above shows the performance of the FCFP portfolios since their inception in 2020. The portfolios now have over 3 years’ performance data in some of the toughest market conditions we have seen.
2022 was clearly a challenging year for investors and the economy. The topic of inflation within the economy is expected to improve, however the question remains – what would the cost be to improve the inflationary environment? Interest rates continue to rise and at an aggressive pace and thus it is likely actions will continue to have an impact on the economy well into 2023. As we enter the next phase of the market cycle, we continue to take a cautious stance whilst being mindful that volatility within markets very much remains. We continue to believe a well-diversified, risk-aligned strategy remains the best way to achieve financial objectives. We maintain regular lines of communication with all our key investment management partners and regularly monitor all recommended strategies.
We would stress that it is key to keep long term goals in mind to avoid any short-term reactions. Please get in touch with your local Financial Planner for further information on how our investment strategies are placed to handle the next phase of the market cycle.