Wishing you a happy, peaceful, healthy and successful new year.
2022 was a year dominated by unforeseen events and some extreme volatility in all global asset classes. Most notably, the long and comfortable era of subdued inflation and ultra-low interest rates, came to an abrupt end. It was a rather painful year for both bonds and equities (a very rare combination). The scatterplot below highlights the extreme outlier of 2022, and the worst year in global bonds since 1871.
After a particularly weak third quarter, the equity markets bounced back at end the year, well off the lows. Improving inflation prospects, albeit far from target levels, and the reopening of China, (following restrictive COVID regulations) came in and supported investor sentiment. While global bonds were marginally down, global equities rallied by 9.8% in the fourth quarter. That said, the MSCI AC World index was down 18.4% for 2022. The S&P 500 index lost 18.1%, Europe was down 15.5% and China down 23.2%. Interesting to compare this to the domestic equity market, up 15% for the quarter, edging the total return for 2022 to 3.6%.
For now, higher interest rates to stem inflation will curb global growth. Recessionary concerns remain. Inflation is peaking and is expected to decline sharply towards year end. Interest rate hikes are likely to peak later this year. We know that markets are forward looking. After a period of extreme challenges, the flipside is that unique investment opportunities are created. Will that be the case for 2023?
Asset classes are cheaper, and valuations are becoming more compelling. A more bond friendly world, not seen for some time, warrant a closer look at global bonds in a diversified portfolio. Domestic bonds cannot be overlooked, currently yielding double digit returns and certainly justify a position in a balanced portfolio. Global equities are trading below average, providing excellent stock selection ideas. Local equity markets remain attractively priced. Investing in carefully selected fundamentally solid companies, can provide superior investment returns for the patient investor.
Periods of volatility are certainly uncomfortable, yet opportunities, here and abroad, have been created. An investment objective to provide inflation beating returns over time remains more crucial than ever. It is essential to focus on your unique investment horizon and financial requirements and optimise your portfolio accordingly.
The table below highlights the performance of selected markets and asset classes to 31 December 2022.
Thank you for your interest and ongoing support.
We welcome any feedback or questions.
Oliver, Ulf, Vanessa and Warren