The year ended on a mixed note as the global markets experienced interest rate hikes, which were anticipated to moderate, and China easing its zero-COVID policies in the middle of its winter season.
Looming but much anticipated
Financial markets ended a challenging year on a mixed note, as investors held both the easing of China’s restrictive zero-Covid policies and optimism that a moderation in the global interest rate hiking cycle is underway, against weakening economic activity data and the anticipation of slower global growth in 2023. Paired with ongoing geopolitical tensions, it is unsurprising that the International Monetary Fund (IMF) postulated that the year ahead would be ‘tougher than the year we leave behind’.
After four consecutive interest rate hikes of 75 bps, the US Federal Reserve (US Fed) increased interest rates by 50 bps, bringing the policy rate to 4,5%, the highest level since 2007. The move was largely anticipated, with a backdrop of continued moderation in producer and consumer inflation prints for November. Concerns of persistence in pricing pressure and a US labour market showing sustained resilience, however, featured in accompanying information and provided some read-through on the progression of the interest rate cycle. The Fed’s economic projections forecast a terminal policy rate above 5,0%, up from the 4,6% at prior release and projections for higher unemployment and weaker economic growth in the upcoming year. Minutes from the meeting, released in the first week in January 2023, also corroborated that compromise was inevitable and that the peak in US policy rates is yet to come.
The Bank of England (BOE) and European Central Bank (ECB) also hiked interest rates by 50 bps respectively. Both regions face weak growth expectations and inflation data appears to be taking a turn, with further moderation in inflation prints for December from France and Germany. Nonetheless, the ECB still struck a particularly hawkish tone. The Bank of Japan announced an unexpected change to their yield curve control policy, which would now allow a larger deviation of 50 bps from its 10-year yield target of 0%, up from the previous band of 25 bps. This will allow long-term interest rates to rise more.
For markets, the year was defined by the impact of inflation, geopolitics and a steep global interest rate hiking cycle, which led to the uncommon breakdown in negative correlation between equities, as well as bonds, and saw both asset classes deliver meaningful negative returns for the year. Outside of the US dollar, energy sector and specific commodities, there were few places to hide. Although developed-market equities banked double-digit returns in the last quarter, they still ended the year in the red. Interest-rate-sensitive growth stocks, in particular, technology counters, declined meaningfully from their lofty valuations at the start of the year, especially relative to value stocks. Local Chinese markets also rallied once more in December as Covid restrictions were lifted, with the Hang Seng gaining 6,4% over the month and 15,7% over the fourth quarter. This provided some ballast to emerging markets, which have been under duress from weak economic growth in China, higher interest rates and a very strong US dollar. The MSCI Emerging Markets Index advanced 9,8% over the quarter but lost 19,7% over the last 12 months.
Smaller interest rate hikes from major central banks helped global bond markets deliver another positive month in December. The Bloomberg Global Aggregate Bond Index advanced by 0,5% over the month, bringing returns over the quarter to 4,5% and improving the yearly decline. Nonetheless, 2022 was a tough year for sovereign-bond investors with a drawdown for the same index of -16,2%.
Incoming domestic economic and trade data painted a grim picture for the Chinese economy as the year drew to a close, with a concerning read-through for global growth in 2023. The relaxation of pandemic restrictions in China in December comes at a critical juncture, but is complicated by the timing (winter), level of vaccinations and reported increase in infections and deaths.
This is made even more complex by the potential for new variants and, therefore, makes any immediate translation to improved economic growth prospects less likely. In the aftermath of the 2022 market turmoil, investors are starting the new year, rightly trying to ascertain just how much uncertainty and bad news are already priced in?
Want to know more?
Here's what to do:
Nedgroup Private Wealth (Pty) Ltd and its subsidiaries (Nedbank Private Wealth) issued this communication. Nedgroup Private Wealth is a subsidiary of Nedbank Group Limited, the holding company of Nedbank Limited. ‘Subsidiary’ and ‘holding company’ have the same meanings as in the Companies Act, 71 of 2008, and include foreign entities registered in terms of the act.
There is an inherent risk in investing in any financial product. The information in this communication, including opinions, calculations, projections, monetary values and interest rates, are guidelines or estimations and for illustration purposes only. Nedbank Private Wealth is not offering or inviting anyone to conclude transactions and has no obligation to update the information in this communication.
While every effort has been made to ensure the accuracy of the information, Nedbank Private Wealth and its employees, directors and agents accept no liability, whether direct, indirect or consequential, arising from any reliance on this information or from any action taken or transaction concluded as a result. Subsequent transactions are subject to the relevant terms and conditions, and all risks, including tax risk, lie with you.
Nedbank Private Wealth recommends that, before concluding transactions, you obtain tax, accounting, financial and legal advice.
Nedbank Private Wealth includes the following entities:
Please take a moment to give us your suggestions