Welcome to the Quarterly Investment Review for Q4 2022.

Our Investment team have put together a range of resources to update you on what has happened in markets across the fourth quarter of 2022. Here you will find: 

• High-level, global equity performance analysis
• Soundbites from our team of investment experts
• A written summary covering the quarter's main market events

Global Equity Performance Analysis:

The graph below shows global equity performance across the quarter and plots world events along the performance line to indicate their impact on markets.

Hear from our Team - Investment Soundbites

Hear from our team of Investment Managers as they each explore an important topic from the quarter.

Chris Bell, Investment Manager: Will inflation slow in 2023?

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James Penn, Head of Equity: What are the prospects for markets and economies?

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James Fitzpatrick, Head of Funds: Energy Markets in 2023

Summary & Outlook - Q4 2022:

Equity markets rallied from the lows again in the fourth quarter, with global equities reaching 15% gains before settling back closer to 10% as the quarter drew to a close. European equities ended the quarter rising 12.1%, with UK markets up 9.8% while the US achieved only 7.8%. The best performing equity market was Hong Kong, up over 15% with a swing of over 30% having fallen almost 15% during October.

Sentiment was ultimately driven by growing expectation that central banks will “pivot” away from monetary tightening and begin a new easing cycle. Cracks in global central bank hawkishness began to appear in October, with Canada and Australia delivering lower than expected interest rate rises. The ECB raised interest rates by 0.75% but toned down the commentary as Lagarde appeared increasingly accepting of a “looming” recession. After November’s sharper than anticipated decline in headline US inflation, Jerome Powell followed, indicating that the December’s meeting might be the time for moderating the pace of tightening.

The Federal Reserve’s final 2022 interest rate hike was smaller than the preceding four hikes, but it took the borrowing rate to its highest level in 15 years and there was little sign of change in tack, with the committee’s forecasts indicating no reduction in rates until 2024. As a result, equities lost some momentum into the year-end.

Bond prices have been correlated with equity prices through the quarter, with yields falling into the Fed’s December meeting, but have since begun to reverse. The Bank of Japan abruptly adjusted its yield curve control policy by raising the 10-year government bond yield cap and widening the range. Even though the 0% target was maintained, it signals a dramatic shift in a policy that has remained unchanged since 2016 and, with Governor Kuroda’s term due to expire in April, the stage could be set for Japan to join the ranks of other global central banks and enter a tightening cycle.

The Yen surged on the day but also strengthened over the quarter after an incredibly weak year. It has been a volatile year for currencies and the US dollar has weakened from its highs, down 7% against a basket of currencies.

The consensus outlook for 2023 is a shallow recession in the second half of the year. This thesis is largely driven by the fact that we are entering an inflation driven recession, not one caused by credit excess and, as such, the impact on corporate earnings will be much more modest. In addition, there are strong economic fundamentals: Robust labour market, strong balance sheets, resilient housing markets.

However, it is an incredible ask for central banks to execute such accurate policy, especially after reacting too slowly to inflation at the outset. We believe that central banks will be looking for coincident or even lagging indicators that inflation is being tamed before changing the course of their aggressive policy and therefore see potential risk to the downside. After losing control of the vehicle on the ice, we are now steering full lock in the other direction and, unsurprisingly, we still find ourselves swerving out of control. The use of a blunt, inaccurate tool to bear down on excess consumer cash balances is likely to cause greater collateral damage than the market is currently anticipating.

While corporate earnings have been resilient with companies able to raise prices in line with inflation, as aggregate demand pulls back we expect earnings to begin to suffer. We are becoming more cautious and adding to government debt with some inflation protection to balance risk. This should protect capital and provide capital for reinvestment into high quality companies at more attractive prices should the opportunity arise. Despite our slightly negative view, it is important to understand that this will be a policy induced recession and the economy remains structurally resilient.

Disclaimer: The views, thoughts and opinions expressed within this article and soundbites are those of the authors/ speakers and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit‍