Global Market Overview – December 2022
Tough times teach investors lessons. Here are a few of the things we believe multi-asset investors should take away from 2022:
1. Nothing lasts forever
In the years leading up to 2022, it really felt like growth/tech stocks only ever go up. 2022 showed us that this is not the case.
My favourite example of this is looking at value vs growth. The chart below shows the MSCI growth and value returns for investing £100 in the five years running up to 2022:
Over this time period, growth trounced value as big tech took to the skies. If you also had £100 and were new to investing in 2022, you might think – ‘growth always does well, I’m going to put my money into that.’
The next chart shows the return from investing £100 in the same indices over 2022:
Although it lost in absolute terms, value outperformed growth by over 20% in just one year. Trends that once seemed unbreakable – crypto, ARK, Chinese growth, falling interest rates, etc. - … eventually break.
As multi-asset investors, you shouldn’t hold the same view forever. The world changes, the economy reaches a new stage in a cycle, and the assets that are in favour will switch.
2. Beware of predictions
Around the start of each year, all the big investment banks and buy-side firms cast their predictions about the year ahead.
A lot of these places will have reams of PhDs and CFAs working tirelessly to build the best expected returns framework in the business. So surely, they are pretty good at predicting what will happen? …NO!
Let’s look at where they thought the S&P would end 2022, at the time of writing their year ahead predictions at the end of 2021:
The S&P actually ended 2022 at 3,839.50.
You might be thinking, ‘2022 was a really tough year with surprises around every corner.’ This is true, but even if you use longer time periods, Wall Street’s track record is still terrible, and studies confirm this.
Predicting what is going to happen in markets is extremely hard. When they wrote each of their predictions, Wall Street probably made highly reasonable assumptions given the data they had… but the world changes in highly unpredictable ways.
Core Views
Over the next twelve months, we think markets will generally move sideways with volatility. In this environment, it is important to rely on a stable identity. Economic uncertainty creates fear and investor sentiment tends to overreact to economic turning points. Going forward, we believe that:
• Inflation will come down. Goods inflation is slowly normalising, and supply chain pressures are easing.
• Central banks are getting close to the end of their hiking cycles, but there is still a bit more work to do.
• A US recession is highly likely. Most leading indicators point towards a recession, but the recession shouldn’t be too long or deep.
Source: 7IM
And so, investors are starting to worry about what’s next for financial markets. Economic data isn’t likely to stabilise until next year, so ‘sideways with volatility’ is the most likely scenario for the next few months.
Summary
Investors should try to focus on the fact that investing in the stock market over the long term, is a powerful tool to preserve the purchasing power of their wealth and on ensuring that they have an appropriate asset allocation for the level of risk with which they feel comfortable. A disciplined approach to asset allocation and identifying good active managers who can navigate these conditions successfully remains of the utmost importance.
January 2023
With thanks to Seven Investment Management LLP for their views and market thoughts. RiverPeak Wealth Limited