So long and good riddance to 2022. War, inflation, rising interest rates, and economic bottlenecks led to poor portfolio returns. 2022 was unusual in the sense that equities and bonds both fell simultaneously by significant amounts. Usually, bonds act as a safe haven when equity markets fall. As a result, a balanced 50/50 portfolio of global stocks and bonds had its worst year in nearly a century.
Markets had to adjust to interest rates returning to more normal levels, and large-cap growth stocks (such as Meta and Tesla), which had led the market on the upside, suffered much larger declines than the overall market. Purely speculative investments, such as digital currencies and NFT tokens, were harder hit still, with some suffering complete capital loss. These types of adjustments – unfortunately – occur every cycle as speculative excesses are worked through (or, less euphemistically, as the naïve are parted from their money). Closer to home, we also saw residential property prices begin to fall – ending the myth that they can only rise.
Despite the seismic shift in interest rates and accompanying asset price declines, one welcome thing that we didn’t see over 2022 was the type of stresses associated with the global financial crisis of 2008. Overall, the adjustment to higher rates globally has been orderly, and, as discussed below, the silver lining is that we should now expect higher longer-term returns from most asset classes, given higher cash rates and income yields on offer. In our view, risks are now more evenly balanced. Although economic growth is expected to be weak in 2023, with many economies likely to be in recession, this reduces the risk of higher core inflation. Energy prices are now clearly off their peak, partly due to the good luck of a warm European winter, which will reduce headline inflation rates.
