The year 2022 was a challenging one for international investors from a portfolio valuation perspective as well as for those who needed to or were forced to sell positions during the year.

Both stocks and bonds declined appreciably in value as the combination of unprecedented interest rate increases by major global central banks to combat high levels of inflation and Russia’s war in Ukraine dented investors’ sentiment and appetite for risk taking. US equities, for instance, recorded their worst annual performance since the global financial crisis of 2008. The benchmark S&P 500 index retreated by roughly 19 per cent during the year following an advance of approximately 27 percent in 2021. The blue-chip DOW index ended the year lower by nearly 9 per cent, contrasting its 19 per cent rise in 2021; while the technology concentrated NASDAQ 100 index tumbled 33 per cent in 2022 after it had ascended by 27 per cent in 2021. There was also a decline of 13 per cent for the European benchmark STOXX 600 index. For bond investors, it was the worst year on record for the Barclay’s US Aggregate Bond Index since it began in 1976, down about 15 per cent. Similarly, the Barclay’s Global Aggregate Bond Index also had its worst year since inception, down about 14 per cent in 2022.

Commodities in the form of oil and gold, however, fared much better despite the US dollar recording its biggest annual gain since 2015. The price of WTI crude rose by 6.7 per cent, while Brent was higher by 10.5 per cent in 2022. Both had risen by more than 50 per cent in 2021. Meanwhile, the price of gold recorded a meagre loss of 0.3 per cent for 2022, adding to its 3.2 per cent decline from 2021. Nevertheless, synchronised global central hiking, led by the US Federal Reserve (Fed), due to stubbornly high levels of inflation fuelled extreme market volatility, culminating in weak performances in most financial assets.

Will 2023 be a happier new year overall for investors?

The consolation for investors going into 2023 is that last year’s performance is unlikely to be repeated. Inflation should continue to moderate (particularly in the US), thereby allowing the Fed to pause its rate-hiking campaign in the first half of 2023. And while the US economy will likely weaken from the impact of cumulative Fed rate increases, a deep or prolonged downturn is not expected. As a result, both equity and bond markets should perform better in 2023. Bonds should, however, outperform equities, given the starting point of higher market yields and the expectation of some lowering of yields during the year arising from the continued cooling of inflation and eventual pause in Fed rate hikes. Specifically, investment grade or high credit quality bonds are expected to do well. An expected stable or lower interest rate environment in 2023 should also increase investor appetite for longer dated bonds to lock in higher income and potentially higher returns for an extended period.

Despite the consensus that financial market performances should improve in 2023, market conditions are expected to remain volatile near term. With Europe (perhaps) already in a recession, the US probably requiring one to meaningly slow inflation, and growth slowing in China, fears of a global recession will likely mount, keeping investors on edge during the first half of the year. A patient and cautious approach to investing is, therefore, still advisable for investors.

Eugene Stanley is the VP, fixed income & foreign exchange at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual, and institutional investor. Visit our website at www.sterling.com.jm

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