The chart shows the returns in local currency across a cross sample of major indices.
The table below shows Investment Association sector average returns broken down by asset class and geography, this time in sterling. The US dollar was strong in 2022 vs. sterling, yen and euro but there was a step change in Q4 ’22; sterling rallied from its lows post the Kwasi mini-budget, and the US dollar weakened against a broader mix of currencies.
Data from FE Analytics
Most asset classes enjoyed a reversal of fortunes in the final quarter of 2022. Index-Linked Gilts, North American equities and UK direct property, the latter two of which have enjoyed positive returns throughout 2022, fell to the bottom of the pile, while some of those asset classes that had been in the doldrums enjoyed a positive end to the quarter.
Europe excl. UK equities finished the quarter in low double-digit territory. In what has been a tumultuous year in general, Europe felt the impact of the war in Ukraine more sharply than other equity markets, due to not only its proximity but also Russian energy dependency. UK equities broadly benefitted during the quarter with high single-digit returns thanks to its high exposure to energy, resources and financial stocks.
Emerging markets, specifically those with proximity to China fared less well during the quarter as China rushed to transition from a zero-COVID policy to a ‘living with COVID’ policy. The murky Chinese property market is an added headwind for the region and akin to Europe, we anticipate a tough start to the year.
The following table shows the winners and losers in terms of the industrial sector for the quarter in local currency:
Data from FE Analytics
Old economy sectors, those that have not advanced significantly from a technology perspective, finished the quarter in poll position. It was a difficult year for most sectors but there was a notable improvement for all sectors during the quarter with energy, industrials and materials performing well. Sectors that had been the darlings over the last decade, technology and consumer discretionary (which hides within it names such as Tesla and Amazon), which have been hurt by consumers tightening their belts, were relegated to the bottom of the performance table.
There has been a notable style divergence throughout 2022, with ‘value’ as an investment style significantly outperforming ‘growth’ during the quarter and indeed, the year. Growth stocks have been particularly hard hit as a ‘growth’ company’s value today is based on its potential cash flows and profits in the future. When we believe interest rates will remain elevated in the future (as we currently do), the value of those future cash flows and profits become less valuable to us today. We refer to these assets as ‘long duration assets’ because their value is based on their long-term profitability. In short, rising interest rates are never a friend of growth stocks.
Fixed Income
It has been a difficult year for fixed income and index-linkers particularly, who finished the quarter in negative territory. Even short-dated fixed income, which usually provides downside protection, did not provide as much as we would usually expect. Pain was felt in the long-dated gilts which bore equity-like risk in 2022. Despite a difficult year, Q4 ’22 has seen a recovery in fixed income markets and defaults remain low.
We continue to use strategic bonds but have reduced short-dated fixed income funds and have tentatively started to increase duration; the fall in fixed income markets provided an opportunity to add to select pockets of value within fixed income.
Currencies
Whilst the story of the year was a strong US dollar, particularly against sterling, the story of the quarter was the dollar weakening, partly against an oversold sterling but also against a broader range of currencies.
