2022 has proven to be a very challenging year for all asset classes as they faced both an interest rate and growth shock. Concerns in the first half of the year were primarily driven by a faster than anticipated pace of central bank interest rate rises in conjunction with elevated and rising inflation, exacerbated by the war in Ukraine which spurred rises in energy and food costs. In recent weeks, the primary concern has shifted towards the outlook for economic growth and rising fears of recession with plenty questioning whether a ‘soft landing’ can be engineered by central bankers.
There are obvious downward pressures on growth, continued disruptions from Covid (particularly in China) pervade, supply chains remain interrupted and rising energy costs will combine to stymie growth. Consumer confidence is very low as central banks seek to suppress demand in the economy to bring inflation back down. Offsetting this are strong consumer balance sheets, low unemployment levels and rising (nominal) wages. Lower growth and higher inflation are the order of the day and the threat of recessionary risks are building.
Central banks’ moods have undoubtedly hardened and if quelling inflation means pushing economies into recession, then that is a price they are prepared to pay. UK Government policy is now seemingly working against its central bank. The Federal Reserve has moved to quickly raise rates from 0.25% in March to 3.25% today. The Bank of England began raising rates in December and whilst more conservative in their approach, they currently sit at 2.25%, with plenty more to follow. The ECB began its rate raising cycle. In contrast, the People’s Bank of China is already easing policy as it faces its own growth slowdown amidst COVID disruption.
Fixed income markets have offered little in the way of protection this year. Bond yields continue their relentless march higher and widening credit spreads are creating a double-whammy of bad news for bondholders. Whilst we continue to use strategic bond funds and short-dated fixed income funds to reduce the impact from rising yields, they too posted deeply negative returns.
The mood in equity markets showed signs of improvement early in the quarter, but by mid-summer, worries that central bank policy would push economies into recession undermined those more optimistic tones. The consumer discretionary and technology sectors saw the biggest falls, whilst energy is holding on to positive returns for the year. Value investing as a strategy has fared relatively better than ‘growth’, but negative numbers are sadly the broad trend of 2022.
The dominance of the US dollar continues as firmer interest rate rises have been delivered with more to come. The Bank of Japan was forced to intervene to try and support the yen, whilst currency markets took a very dim view of UK government plans to stimulate the economy through tax policy, pushing sterling ever closer to parity with the US dollar.
Brent Crude started the year just below $80/barrel, peaking at just shy of $130/barrel and finished the month at c$85. Gold finished the month at c$1660/oz.