Investment update for December 2022
The month of December noted a selloff of risk assets. Stocks and bonds took heavy losses amid reignited fear that surging interest rates would spark a global recession. The primary drivers of financial market volatility throughout 2022 were central banks’ battle against inflation and the war in Ukraine.
The US economy is heading into 2023 on a mixed note. Inflation peaked in June and has been decelerating ever since. Once food and energy prices are excluded (which are the most volatile), core inflation is starting to decelerate as well. Retail sales declined in November and Purchasing Manager Index (PMI) measures weakened for the third-consecutive month. The housing market generally showed further signs of deterioration in the face of rising borrowing cost. Labour markets continue to hold strong, and the widening gap between new job openings and unemployment has pushed wages higher which is good for workers but bad for inflation.
In Europe, the latest data suggests that inflation may have peaked, but the policy of tightening continues. The European Central Bank (ECB) also intends to begin reducing the size of its balance sheet, alongside rising interest rates. Oil prices have been particularly volatile over December as investors struggled to figure out the potential outcome of EU efforts to cap prices with Russian efforts to undermine these caps. In economic data, PMI measures in Europe improved in December.
Global central banks continued with aggressive monetary policy tightening. The US Federal Reserve (Fed), Bank of England (BoE) and ECB raised interest rates by 50 basis points (bps) as expected. These central banks predicted rates would continue to rise to tackle the high inflation, despite the negative impact on the economy and the recent softening of prices.
The Bank of Japan (BoJ) tweaked its yield curve control policy in a surprise move at its December monetary policy meeting, widening the tolerance band for its 10-year Japanese government bond yield. The market reacted strongly to the news, producing large negative returns for Japanese equity, whilst strengthening the Japanese Yen.
The Australian market finished December with losses in both stocks and bonds, but the selloff was relatively mild compared to other advanced economies. Utilities and industrials were the biggest losers, while the energy sector gained slightly. Domestic housing downturn extended into December. Listed real assets, property and infrastructure produced large negative returns.
China is rapidly easing its COVID-related restrictions including shortening quarantine periods, easing travel restrictions, and lessening COVID testing requirements. December economic activity was especially soft due to soaring COVID cases. Export also fell significantly, likely reflecting weakening global demand. The disappointing economic data and concerns over geopolitical tension led to negative returns in China equity.
The calendar year of 2022 suffered through a bear market in equities, the highest inflation surge since the 1970s, and the worst year on record for investment-grade fixed income. US stocks fell sharply with the technology sector taking the heaviest hit. The Treasury yield curve was the most inverted since the early 1980s, highlighting the risk of recession in 2023.
Emerging market stocks registered negative returns over 2022 in the face of tighter financial conditions and growth headwinds from the war in Ukraine and China’s property sector. Debt levels of many emerging market countries have risen sharply in response to both the pandemic and cost-of-living crisis, resulting in weaker fiscal positions. At the same time, the reopening of these economies and the energy price shock have led to a deterioration in current account balances.
The Australian economy remained resilient amid global slowdowns which was supported by strong demand for commodities and solid labour market. On the back of strengthening US dollar, the Australian Dollar (AUD) has been in a downtrend over 2022. A deteriorating economic outlook, exposure to a slowing Chinese economy, fluctuations in commodity prices and inflation have collectively contributed to the decline of the AUD.