Done and Dusted
The final quarter of 2022 proved to be a partial offset to the rest of the year’s poor outcome for investors. However, December couldn’t match November’s rebound in financial asset prices that started in the second half of October.
Indeed, December was a lacklustre month for investment returns compared to November largely due to changed perceptions about the global economy. Economic data pointed to a greater probability of recession in most developed economies including the most robust to date, the US. Despite a moderation of growth and inflation data, US Federal Reserve Chair, Jay Powell, was keen to voice his determination to conquer inflation via higher interest rates. Much the same was said by the Governors of the European Central Bank and the Bank of England, albeit from weaker economic starting points.
The prospects for higher than expected official short term interest rates unnerved markets. Notably, in government bond markets, the UK 10 year government (gilt) yield rose 60 basis points or 0.6% in December to 3.7%. Credit markets followed suit, maintaining spreads within investment grade debt but fears of default caused high yield spreads to widen in lower quality credits.
China’s volte face on its zero-Covid policy after widescale public protests caused initial bullishness for Chinese equities before reports of a surge in infections and hospitalisations caused concern. However, the prospect of China’s reopening caused Chinese stocks to buck the negative trend elsewhere. Most regional equities sold off, led by the US where the S&P 500 was off almost 7%. Other regions fared better but were still in negative territory for December.
In global thematic equities, the degree of negative returns in December was mixed. Those with the biggest future growth expectation, such as technology and artificial intelligence, suffered the most whereas more stable, less aspirational themes like healthcare and those related to climate change were less negative.
Commodities posted a positive month overall. Natural gas was one of the weaker energy commodities in contrast to oil which finished the month in positive territory. In metals, copper had a positive month although outshone by gold. In softs, agricultural commodities did well as demand continued to outstrip supply.
Currencies were relatively quiet compared to previous months with the US dollar edging higher following a period of weakness. The Japanese yen responded well to the Bank of Japan’s Governor’s higher range for long-dated Japanese government bond yields. While Japanese equities floundered initially, the Central Bank’s action helped reverse the yen’s weakness and prompted short-covering from speculators.
Cryptocurrency headlines continued to be dominated by the fallout from FTX, highlighting the lack of regulation to date and the potential for fraudulent activity.