Quarterly Market Update: Here’s to a better 2023

At a glance:

  • 2022 proved a difficult 12 months for financial markets
  • Avoiding making rash decisions on short-term volatility is important
  • Company valuations suppressed by market conditions might provide a long-term opportunity

When I wrote this column at the start of last year, I reflected on what had been a largely positive 2021 for investors but noted that cracks were beginning to emerge – with inflation rising and central banks beginning to increase interest rates.

I think it’s fair to say 2022 was a much tougher year than expected, as these cracks turned into a cost-of-living crisis. Things were made only worse by Russia’s tragic invasion of Ukraine in early February. The war continues unabated, as have the economic sanctions the West imposed on Russia in response.

Inflation and interest rates have continued to rise throughout the year. In the UK, inflation peaked at over 11% in October, before falling slightly in November. Meanwhile, US inflation fell gradually in the second half of the year, although it remained high at 6.5% in December.

Has inflation peaked? It’s impossible to say. Even if it continues falling in the UK, it is clear we still face a tough economic climate, and many are now expecting the UK to enter a prolonged recession.

To further complicate matters, the political landscape in the UK shifted rapidly in the second half of the year. Boris Johnson was replaced by Liz Truss in September, and she was in turn replaced by current Prime Minister Rishi Sunak in October. Although Sunak has helped steady the political ship somewhat, he still faces significant challenges in the months ahead. The aforementioned cost-of-living crisis is hurting vast swathes of the population, and there was some form of strike almost every day in December.

Given all these challenges, it was impressive that the FTSE 100 ended the year up 4.7%. A number of companies did much of the heavy lifting, with the likes of Shell and BP growing almost 50% over the year. Amid all the doom and gloom of the year, oil and gas, and mining companies provided a number of opportunities for investors.

In general, however, financial markets endured a tough 2022. The S&P 500 and NASDAQ fell by more than 15% and 6%, respectively, over 2022, while performance was similar in Europe, where the MSCI Europe ex UK Index fell 12% in local currency terms. Globally, the MSCI All-Country World Index of stocks lost around a fifth of its value over the year measured in US Dollars (although thanks to currency fluctuations, it was closer to an 8% fall in sterling).

Many companies that did so well in the lockdown period fared badly last year, as market conditions dramatically shifted. Tech stocks suffered a particularly bruising period, with some household names suffering significant falls in value. Meanwhile, digital assets such as crypto currency, already known for their volatility, underwent some of their darkest times yet.

All in all, I wouldn’t be surprised if the vast majority of investors are glad to see the back of 2022.

Consider the long term

If 2022 proved anything, it’s that short-term events can be unpredictable. Take the Winter World Cup as an example. Winning the trophy is estimated to add around 0.25% to GDP growth in the two subsequent quarters, primarily driven by enhanced export growth. Of course, Argentina won in Qatar through penalties – so how much to the Argentinian economy, or to Argentinian investments, was each penalty kick worth? On the other side, how much was each missed penalty worth to France?

This is why the old adage of time in the market, not timing the market, remains the golden rule of investing. Countless variables can cause short-term fluctuations in valuations, and it is impossible to accurately predict them with any regularity.

While this might make for scary reading, there are actually some reasons for optimism. As market performance is affected by sentiment, history shows that quite often market falls precede a recession, but also begin their recovery earlier. In other words, while there is a good chance that upcoming statistics will indicate we’re now in a recession, much of the pain may already be priced in.

And this is where long-term thinking can also really come in handy. Yes, it is hard to see the end of the tunnel now, but generally it is better to buy low and sell high. If you exit now, selling could see you miss any bounce back in prices.

And there really are some reasons to suggest positivity may lie ahead in 2023. As mentioned, inflation appears to be easing, and this will give central banks some wiggle room to slow interest rate rises. If inflation were to continue to temper, and banks were to pause their rate hikes, history suggests there may be an opportunity for high-quality corporate bonds, especially given the more attractive yields currently available. Despite ongoing issues with COVID-19, confidence is mounting that the Chinese economy might begin to recover in the coming year. Europe has also progressed in weaning itself off Russian energy, and the MSCI Europe ex UK Index even jumped over 4% in Q4.

Without doubt, the road immediately ahead looks difficult. However, right now, plenty of good-quality companies are seeing their values suppressed by wider market forces. I am confident our fund managers are well placed to identify these companies, take advantage of the more reasonable prices, and deliver better returns to you.

Even if the coming months continue to be difficult, by making sensible decisions now, we can make sure we’re set up for long-term success.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

SJP Approved 12/1/2023

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