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If you missed our online event, The Playbook 2023, the event recording is now available here.

Group CEO Greg Ellison hosts a panel discussion on the major macro factors likely to have an impact on businesses and investors in 2023. On the panel were experts from the world of politics, investments and energy who each share their insight into what 2023 could have in store. We hope you find the content useful.

Disclaimer: The views, thoughts and opinions expressed within this video are those of the 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

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?

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

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

Capital International Group recently commenced a three-month trial of free bus travel for its employees when travelling to and from their Isle of Man office. This has been achieved through the purchase of ‘Go Places’ and ‘Go Easy’ cards from Isle of Man Transport.

Organisers and Participants of the Conscious Capital Bus Card Scheme

So far, almost 40 employees are using the scheme which aims to both lessen the financial burden of travelling to the office during the cost-of-living crisis, as well as reduce the emissions produced by the daily commute.

The Isle of Man Government recently capped bus journey prices at £2 to assist with the cost-of-living pressures. Whilst this represents a significant reduction in costs for many, the Group realised that employees who take the bus to and from work each day could still be spending more than £80 per month, if paying per journey, or £50 if using a monthly Go Easy card.

For those switching to free bus travel from driving their own car to the office, there will not only be cost savings but also a significant reduction in the carbon emissions produced.

As part of its sustainability measurements, Capital International Group includes Scope 3 emissions in its overall carbon calculation. These are the emissions that are indirectly caused by an organisation e.g. through the commute of employees.

Alongside Business Intelligence Manager Rhodes Brown, Graphic Designer Sammy Mathewson has been responsible for organising the scheme and is part of the Group’s Conscious Capital Forum, which drives forward sustainability initiatives. She said: “The Group has the ambitious goal of becoming carbon neutral by the end of 2025 and with 43% of its emissions coming from the employee commute, we hope that the free bus travel scheme will help bring the Group closer to meeting its 2025 target. It’s been great to see how many people have started taking the bus. Even if it’s only a couple of times a week, it all adds up! We hope that this initial trial period will be a success and that it is something we will continue long-term.”

Disclaimer: The views thoughts and opinions expressed within this article are those of the author, 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.

There’s no doubt that employees are crucial building blocks to creating a successful business. They not only make sure the business ticks over and operates as it should, but they can also be an important source of competitive advantage.  

People and Culture Partner, Alicia Woodward

It’s not just about attracting and selecting the right people. You have to make sure you get the best out of them by providing the right environment and culture. Success in creating an optimal work environment largely depends upon how well an organisation engages its employees.  

It’s been proven time and time again that an engaged workforce is more likely to be high performing and lead to better business outcomes, but what are the characteristics of employee engagement? And how can a business improve employee engagement?  

The characteristics of an engaged employee

Measuring how engaged employees are can be difficult as there are many ways to do it. Whether it’s looking at how many people attend a work organised event or using qualitative data, such as verbatim feedback from one-to-one checks in. The way businesses measure engagement is different from one to the next, but one simple method that anyone can try is to take a look around the office and observe employee behaviours. Engaged employees share a mindset, a set of behaviours that distinguish them from their disengaged colleagues. It is tangible and clear if you know what to look for…  

Engagement scale with pointer showing 200%. What are the characteristics of employee engagement.

“I love my job”  

Engagement can be seen clearly from those who admit to “loving their job”. Whilst for some people this is an alien concept, engaged individuals enjoy their day-to-day responsibilities and are keen take up challenges. You will see them fulfilling their responsibilities with energy and consistently working to meet or even exceed expectations.   

Dealing with obstacles  

We see from engaged employees that they are much better when it comes to overcoming setbacks and do so with more optimism than defeat. They are a lot more resilient and able to handle change and uncertainty without becoming discouraged. This resilience is used when collaborating with others. When they see colleagues facing a challenge, they encourage them to refocus or try an alternative approach.   

Man at the start of a long and complex maze. Engaged employees often have resilience.

Dedication  

Highly engaged employees are emotionally committed to their employer and genuinely want what is best for them. They can see how the success of the business is aligned with their own, so they go the extra mile. Projects are completed because they know what needs to be done. They are rarely the people who are packed away and ready to bolt out of the door once the clock strikes 5pm. This discretionary effort is an essential element for the good health and well-being of a company.   

Continuous improvement

Engaged employees rarely rest on their laurels, they look for ways to improve processes and deliver better customer experiences. They will regularly be asking themselves and their colleagues how they can do things better with efficient use of existing resources.   

Working with others  

Collaboration is key for these individuals. They are usually excellent team members and will share ideas, insights and suggestions that benefit the whole team. There is a realisation that problems are solved by the active participation of a team, so engaged employees will seek out ways to leverage the knowledge and skills of others in order to get things done.  

With collaboration comes effective communication. The style of communication from an engaged person will often be open, asking questions for clarity and listening to viewpoints. They will share, explain things to help others understand. What is wonderful to see and experience is engaged leaders, as they use effective communication to motivate, inspire and encourage those in their team.   

Creating an employee engagement strategy

As fantastic as it would be for every employee to be 100% engaged, without the right environment, an organisation cannot expect to come close. Employers have a huge part to play in providing a culture that feeds positive engagement – it doesn’t happen on its own.  

People however are inherently different, so how can you ensure that all of your people are engaged? Is it even a possibility? If you are looking for a place to start, there are three mainstays of employee engagement that apply to almost all personality types.  

Communicate a clear mission  

Often, particularly in larger organisations, employees may feel a disconnect between their role and the overall purpose of the company. This lack of clarity around mission and vision can lead to disengagement, with employees feeling that their day-to-day activities lack purpose. To boost engagement, measures can be put in place to ensure an organisation’s strategy is effectively and frequently communicated. This could be achieved through written internal communications or presentations from the leadership team. Sharing this information can lead to increased motivation and engagement as employees have a better understanding of how their efforts impact the bigger picture.  

Lots of markers along a long, winding road. Employee engagement can be improved by communicating strategy.

Trust  

The base of any engagement is trust. Allowing people to complete their work without dictating how is a great way to engage people. They can perform their roles with mutual help and trust, feel like they have their own unique part to play and that they have accomplished something independently.  

Job Satisfaction  

Surprisingly, getting people to the stage of “loving their job” can be easily accomplished, one area to focus on is job and career satisfaction. There is a correlation between engagement and a commitment to learning and developing so having transparent career paths is important. As part of the overall employee experience, being able to see a clear growth trajectory can have a positive impact on people, leading to a sense of belonging within a business.

Those who are satisfied with their career and how it is developing remain with a business for longer than those who see no opportunities for growth. It is important for managers to spend time with their people to learn what motivates them and what their future career looks like. From here, implement a growth plan but remember that growth or development looks different for everyone, do not avoid the conversations because you assume it means they want to move into a role that is unavailable.  Develop the skills and knowledge they will need ready for when the next opportunity arises, they will thank you for it!   

Employee engagement happens in organisations that treat their people as their biggest asset and take care of their basic necessities and psychological needs. Ensure your people have enough challenge, trust, ownership, room for growth and opportunities to collaborate.   

Disclaimer: The views thoughts and opinions expressed within this article are those of the author, 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.

CREDIBILITY RESTORED, BUT HAS IT BEEN AT THE EXPENSE OF INVESTOR AND CONSUMER CONFIDENCE IN THE UK ECONOMY?

It seems scarcely believable that a mere fifty-five days separated this month’s Autumn Statement from its predecessor, the now notorious Truss/Kwarteng mini-budget.

The impulsive and reckless optimism that typified that initial financial package (garlanded with praise on the day after it was delivered by Conservative supporting newspapers and think-tanks as well as plenty of Party activists) contrasts with the sober discipline and restraint of the new Administration.

From a determination to go for growth at all costs in order to stave off the prospect of recession, UK economic policy has been so transformed within a few weeks that the current PM and chancellor's risk averse approach to the public finances means they seem prepared to live with the consequences even if recession results.

Much of the detail of frozen tax thresholds (a highly effective income raiser in an era of rising inflation); reduced in-work entitlements; corporation and capital gains tax tightening and the like had been leaked in advance in an attempt to manage - and perhaps manipulate - expectations, but also in recognition that official forecasting during these turbulent times has been erratic at best.

The sense that 'the grown-ups are back in charge' after the chaos of the latter months of the Boris Johnson premiership and the Truss interlude has certainly helped calm the markets. However, the economic outlook has also darkened markedly.

Indeed, the tax rises and spending cuts set out by Sunak and Hunt in recent days reflect that UK policymaking has become almost entirely dependent upon keeping the international markets on-side. Erring on the side of caution and respecting orthodoxy have once again become the name of the game. This should come as no surprise - after all, the national debt has more than tripled since the financial crisis of 2008, a situation that only appeared sustainable for so long as the cost of borrowing (interest rates) were kept to near zero levels.

At the turn of this year, inflationary pressures finally persuaded G20 central banks to start the long-march back to interest rate normality. As a consequence, highly indebted nations, companies and households have been required for the first time in over a decade to become sensitive to market conditions.

Orthodox economic theory, of course, points to a loosening of monetary and fiscal levers when recession is imminent. There is little sign of the UK economy overheating (the usual cause for aggressive interest rate raising); on the contrary cost of living pressures have been heightened by global supply chain bottlenecks in the Covid aftermath and violent energy price volatility following the invasion of Ukraine.

In all fairness to the Treasury, the Autumn Statement set out a series of departmental spending curbs most of which will not come into play until 2025. Whilst this enables a change of course if inflation were to be slain within that time frame, it also gives rise to suspicion that these plans are 'too clever by half' as the financial reckoning can is kicked yet further down the road.

Arguably they have been crafted in this way in order to put pressure on Opposition Parties either to endorse these arrangements or announce their own fully costed (and scrutinised) economic strategy before the next election. However, apparently clever political tactics risk further undermining international investor confidence in the UK, to say nothing of this package's impact on the household budgets of the working population who will face the cost of underwriting sharply increased borrowing (predicted to rise to £177bn or 7.1% of GDP over the next year) before the real curbs on public spending kick in.

When I speak with seasoned City observers their abiding concern is that the drama that played out over pension fund viability after the 23 September statement may turn out to be something of a canary in the mine. Deeper economic upheaval may lie ahead. After all, there remains a huge mountain of debt in the global financial system; we stand in the midst of a cycle of upward movements in interest rates on an accelerated scale that has caused widespread unease and alarm; meanwhile the opaqueness of debt instruments still underpinning the global financial eco-system has worrying parallels with the apparently benign conditions that apparently applied on the eve of the last financial crisis. Despite the risks to business confidence, maintaining market stability after recent events may have left the government with little choice but to introduce a new era of austerity.

This will be highly problematic. Even the backloaded public spending cuts announced by the chancellor this week will impose public sector pay awards set at levels well below inflation, reducing the real value of the take-home pay of nurses, teachers and the police, for example. Further industrial unrest is now on the cards.

The slashing of public infrastructure budgets is always low-hanging fruit for any departmental cuts. Whilst the government has reaffirmed its commitment to high profile and highly expensive projects such as Sizewell B (nuclear power) and HS2 (rail), a closer inspection of the Office of Budget Responsibility's workings show a significant reduction in medium term public investment which risks adversely impacting future productivity and growth. The importance attached after September's upheaval to maintaining credibility in the financial markets by over-compensating with clear pathways to a (more) balanced budget and rapidly tamed inflation makes a sharp, deep recession almost inevitable.

What of the political consequences of all this?

Recent UK electoral history points to the two contrasting outcomes that applied after a decade or so of Conservative government in 1992 and then five years later when the Party was finally ousted after eighteen years in office.

Rishi Sunak will be hoping to emulate the playbook of that earlier contest when, in the midst of a deep recession, the Conservatives were unexpectedly re-elected under a fresh leader, who persuaded the voters that a change of government was too risky.

One less observed consequence of the recent extreme market turbulence is that the overriding need to maintain financial stability will equally enforce economic orthodoxy on the Opposition Labour Party. On the one hand this presents its leadership with internal party management challenges, but on the other it provides reassurance against political accusations that the policy platform of an incoming government would destroy market credibility. Perhaps the abiding lesson of 2022 and beyond is that the entire UK political class is answerable to the whim of the markets these days.

The difficulty faced by the current administration is that the upheaval of the past nine months in particular may well have irreparably damaged the Conservative brand in the eyes of the electorate with the next general election now only two years away at most. The more PM Sunak acknowledges that 'mistakes were made' by the ill-fated Truss government, his own central role in the previous administration comes under greater scrutiny. His innovative furlough scheme introduced at impressive pace in 2020 when he was chancellor preserved countless jobs and business, but its costs have proved ruinous and a reckoning over fraudulent and unwarranted claims on the public purse may yet cause him political grief.

The lull in hostilities within the Conservative Party may also prove shortlived. Some MPs and many party members regard the events of recent months as little short of a coup against the hardline Brexit they craved. Many are as privately unreconciled as ever to a Sunak premiership and the re-emergence in government of some of his key supporters. Dissent in the ranks is already simmering at the more immediate prospect of the disproportionate impact on middle-earners of the substantial tax hikes that have stabilised the markets and underpin the Autumn Statement. Meanwhile the persistent failure to deal with illegal, small boat migration in the Channel and the deteriorating state of many public services will further test party unity.

The personality feuds that continue to beset the parliamentary party also risk being played out very publicly. The settling of old scores bubbling beneath the surface as one faction finds itself back at the ministerial helm and is undermined by the other clique now restless on the backbenches shows few signs of abating. In the meantime despite the change in leadership, the Party's opinion poll ratings have remained dire whilst each month brings the day of electoral reckoning closer...

The views, thoughts and opinions expressed within this article are those of the authors 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.

Having brought the Island’s first ever digital bank to life back in 2021, Capital International Group is no stranger to managing major projects.

The launch of Capital International Bank was an enormous undertaking and with it came the adoption of a brand-new way of working for many. Initially taken up by the Technology department, ‘Agile’ methodology encourages teams to work simultaneously on different phases of a project and delivers a minimum viable product as quickly as possible, as opposed to following a more linear, step by step, Waterfall approach.

Chief Investment Officer, David Long
Chief Investment Officer, David Long

The Group has since seen Agile send ripples across the business, with several teams now benefitting from ‘sprint’ rhythms, ‘Kanban boards’ and holding daily ‘stand-ups’.

With Capital International Bank going live in 2021 and having operated successfully for over a year, the focus in terms of projects and improvements has now turned to the investment side of the business with a number of changes already underway. Capital’s Chief Investment Officer, David Long, tells us more:

How has Agile affected the Group from your perspective?

The Group has trebled in size over the last 5 years and we have taken on some massive projects – launching the Island’s first digital bank was no small undertaking and required a step change in our project management and development capability, not only in terms of people and resources but in our approach.

We quickly realised that traditional Waterfall approaches to project management were simply incapable of delivering projects of this scale and complexity in an efficient and timely manner. Even the most comprehensive plans tend to fall at the first contact with real life problems and you can end up rewriting specifications endlessly.

The use of Agile processes and management has been critical to making progress. You have to recognise that you simply do not know (and cannot know) the solutions to all the problems you face in such a complex project. The permutations are infinite, and progress is by necessity an iterative process of finding solutions to each problem that genuinely work, before moving onto the next.

It is of course vital to have a very clear vision of where you are headed, together with clear objectives for the success of any project. These keep you headed in the right direction and ensure you don’t lose perspective. Thereafter, flexibility becomes key. Define only the immediate problems that you can see clearly. Break it down into milestones and then further into small sprints with clear deliverables and regular reviews to provide a short feedback loop.

People often talk about ‘MVP’ or ‘minimum viable product’ and I cannot stress how important it is to ruthlessly cut through all the ‘nice-to-haves’ and superfluous specifications to arrive at the absolute bare minimum that you need to take that next step forward. Don’t reinvent wheels and don’t be tempted to take on too much in one go. I can assure you there is more than enough complexity in the MVP to deal with.

Of course, while each step may be small, the process is cumulative and the solutions to one problem help inform and solve the next. When you get this right it’s remarkable how rapidly progress can be made.

With the investment side of the business now having adopted the agile way of working, can you tell us what’s been achieved so far?

Over the past year, as the majority of the bank project was completed, our attention has shifted to the investment business, where we have big ambitions for the development of our investment platform and the tools we can offer our clients and advisers.

One such project has been our investment profiling application, which is truly ground-breaking in its capability. This digital tool has codified the methodology and process we use as an investment manager to identify and assess a client’s investment requirements and to match them to suitable investment strategies. The Profiler does this by modelling and projecting the spread of outcomes for all potential strategies and identifying those that best fit the client’s specific requirements.

The process is iterative and interactive, enabling a client and the adviser to effectively scenario plan into the future and develop strategies that are tailor made to meet their requirements, whist explicitly showing the client the range of possible outcomes so there are no surprises.

The MVP was delivered quickly after a 6-month build phase with fortnightly demos and feedback cycles. Since then, the internal teams have been using the Profiler and providing feedback. Being able iterate on the most basic form of the Profiler using real-world use cases has meant the result, in my view, is breath-taking. The beauty is that it’s so simple and completely intuitive to use and yet behind the charts and projections, every input triggers literally hundreds of thousands of calculations delivered instantly. In all, it has been an 18 month process to release the Profiler to our clients, but we have been using the Profiler internally for a year.

What are you working on currently?

One very recent project was an update to the look and feel of our Investment Portal to align it with the more modern UX design of our banking platform, VELTA. I’m really impressed with the new design as not only have we modernised the aesthetics of the portal, but the user experience has also been improved with an update to the navigation.

We are also working to make it possible for clients to carry out calculations within the Portal rather than having to export their data to manipulate it elsewhere. Having everything in one place will make managing accounts much easier for our clients.

You’re involved in overseeing a lot of this work but you’re also the Group’s Chief Investment Officer. Could you share your thoughts on the current market conditions?

2022 has been an incredibly turbulent year, which I would describe as the economic hangover from the extreme fiscal and monetary policies employed to see us through the COVID pandemic.

As COVID lockdowns closed large parts of the economy, the economic slack was taken up by a massive government spending financed through debt. Government debt in the UK has increased by a staggering 36%, or £600 billion since 2020.

Quantitative easing, or the printing of money, had been normalised as a central bank policy tool in the decade following the last financial crisis; however, in the wake of the pandemic, global central banks unleashed QE on an unprecedented scale. In the UK, the Bank of England’s balance sheet expanded by 86% as £500bn of QE flooded the financial markets. These extreme measures undoubtedly softened the immediate pandemic blow but they have come at a terrible longer-term cost, unleashing double digit inflation, the highest in 40 years. The speed and scale of the inflationary shock surprised markets and the turbulence we have seen is simply the market adjusting to this new environment.

How do you see your strategy evolving amongst all this turmoil?

The good news is that a sizeable adjustment has already taken place. Bond yields have risen by well over 3%. Investment grade corporate bonds offer a yield in excess of 6% and have become attractive again for perhaps the first time in a decade. Similarly, valuations of equities and other risk assets have fallen to much more reasonable and sustainable longer-term levels.

For investors, this means that expected returns looking forward have actually increased very materially over the past few months. Of course, there remain significant economic challenges ahead, with recessions almost certain in Europe and likely in the US, so further market turbulence is entirely possible. However, for long term investors this presents opportunities to acquire good quality stocks at relatively cheap valuations.

Do you have any big plans within the Investment Management department?

With support from the front office teams, we’ve recently been working to carve out a new investment identity that summarises our team’s approach in a way that our clients can easily get to grips with.

This isn’t about changing the way we invest but formalising a lot of the great work the team has already been doing. It’s only natural that our investment approach has evolved over time and this project has been about getting it down on paper in a format that’s easy to understand. The concept and messaging that we’ve arrived at, we believe, encapsulates our thinking well and clearly communicates our belief that sustainability and long-term profitability are not mutually exclusive ideas but go hand in hand. This project is still being worked on but we look forward to sharing more with you in the new year.

The views, thoughts and opinions expressed within this article are those of the authors 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.

Regulated investment and banking activities are carried out on behalf of Capital International Group by its licensed member companies. All subsidiary companies are represented under the Capital International Group brand.

Capital International Limited, Capital Financial Markets Limited, and Capital International Bank Limited, are licensed by the Isle of Man Financial Services Authority. Capital International Limited is a member of the London Stock Exchange. Capital International Bank Limited is a wholly owned subsidiary of Capital International Group Limited (www.capital-iom.com), a privately owned financial services group based in the Isle of Man and operates as a non-retail, restricted deposit taker under a Class 1 (2) licence. Deposits are not covered by the Isle of Man Depositors’ Compensation Scheme and terms and conditions apply.

CILSA Investments (PTY) Ltd (FSP No. 44894) and CILSA Solutions (PTY) Ltd (FSP No. 6650), t/a Capital International SA are licensed by the Financial Sector Conduct Authority in South Africa.

Welcome to the Quarterly Investment Review for Q3 2022.

Our Investment team have put together a range of resources to update you on what has happened in markets across the third 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.

Summary & Outlook - Q3 2022:

Equity markets staged a rally in the first half of the quarter, with some markets up over 10%, driven by expectations that central banks may be forced to halt or even begin unwinding interest hikes in 2023 as recession hits. This also stalled the rise in developed market government bond yields with longer dated yields even beginning to retrace back downwards.

Sentiment turned more negative in the run up to the Jackson Hole economic symposium, where Jerome Powell reiterated the Federal Reserve’s aggressive stance. Equity markets have since fallen unabated as yields have steadily risen. The move inUK Gilts has been most prominent as the Bank of England has been playing catchup with inflation which is now higher than in the US.

In the last week, we have seen an erosion in confidence in UK assets as a fiscal stimulus package was unveiled within Kwasi Kwarteng’s mini budget, as PM Liz Truss’s new government pushes for growth. The absence of offsetting revenue or spending cuts amount to an additional £70bn of debt issuance in the current year alone.In the four days following, 10-year Gilt yields spiked to 4.5% from 3.3%representing a fall in value of 16%. This extraordinary volatility was matched by a steep decline in Sterling, with the Bank of England forced to step in to settle markets by purchasing Gilts.

The situation presents an illustration of the dichotomy brought about by inflation within the context of an energy supply crisis. While central banks race to tighten liquidity to stamp out inflation, governments are under pressure to shore up the economy and support the populous through the cold winter.

Equity markets ended the quarter down with the US falling 5.3%, European markets down 4.2%,and the UK off 4.5%. Despite falling 33% this year, the tech heavy NASADQ fared better this quarter falling only 4.1%. When factoring in currency effects, theS&P500 has regained ground and achieved similar year-to-date performance as the FTSE 100, which was the best performing market by far at the end of last quarter. As an energy producer itself, the US looks relatively well insulated from events in the Ukraine and, having raised rates more quickly than other developed economies, has benefitted the dollar substantially; rising 17% this year against a basket of currencies.

It has been a difficult year for investors and bonds have done little to pare losses with global aggregate bond indices falling 20%.With price levels having have caught up with money supply levels, inflation appears to have peaked in the US, albeit a downside surprise in August failed to gain much traction intoSeptember. However, there are numerous indicators that the downward trend should gather pace. Commodities such as copper, iron ore and lumber are trading back down at 2020 levels while used vehicle and housing activity has slowed as inventories build and shipping costs fall.

Potentially the most important commodity to watch is crude oil; as a global indicator of economic activity, it has fallen over 30% since peaking in June. We are yet to see the peak in European inflation, but the region has managed to store good levels of natural gas and looks set to make it through to Spring. Winter fuel demand has yet to ratchet up, but spot energy & electricity prices have fallen, and the energy crisis outcome could be better than feared.

Central banks are hoping to avoid a further round of wage increases and subsequent second round inflationary effects. The difficulty for investors is that the effects of tightening can take 12-18 months to filter into the economy. Unlike during the previous shock, where central banks and governments stepped in within a month, this time round, patience will be required.

It is important not to lose faith and remember that this is a policy induced deflation of a bond bubble. Should inflation wane, assets will be boosted by expectations that central banks will be able to reverse course. Should we seethe opposite and inflation is sustained, savings will be eroded unless invested in a diversified portfolio of real assets. Given global debt levels, it is unlikely that central banks will be able to maintain their current course.

Hear from our Team - Investment Soundbites

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

James Fitzpatrick, Head of Funds: Will We See a Hard Recession in 2023?

Chris Bell, Investment Manager: Will Inflation Keep on Rising?

Greg Easton, Investment Specialist: Is This a Turning Point for Sustainable Investment?

James Penn, Head of Equity: Is Trussonomics Over Before It's Even Begun?

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

The Isle of Man is the world’s only ‘entire nation’ Biosphere and the UNESCO Biosphere Awards look to highlight those making a positive contribution to the Island’s sustainable future.

Taking place at the Manx Museum and presented by The Lieutenant Governor, His Excellency Lieutenant General Sir John Lorimer and Lady Lorimer, the awards attracted entries from local organisations across a range of sectors.

Having entered the ‘Economy’ category, Douglas based financial services company, Capital International Group, were proud to be presented with a UNESCO Biosphere Award for a second year running.

The Group set out on its ‘Conscious Capital’ sustainability mission back in 2020 and has since made huge strides in making the business more sustainable. There are many areas where the Group has made significant progress, be that reducing its carbon emissions, optimising employee wellbeing or making a lasting and positive impact in the community. 

This year, the Group’s application was largely based on its sustainable investment management offering. Fusion ESG is the Group’s flagship, 100% sustainable portfolio which focuses on four investment themes: Sustainable-Agriculture, Water, Clean Energy and Healthy Living. Since launch, over £20m has been invested into the strategy.

Investment Specialist, Greg Easton, who manages Fusion ESG, said: 

“We believe clients can achieve their financial goals whilst making a positive environmental and social impact. Investing sustainably shouldn’t compromise performance. In fact, since adopting our ‘Conscious Capital’ non-exclusionary approach, we’re finding our research is helping us to build future-fit portfolios by identifying environmental risks and helping us unearth companies that can deliver sustainable Alpha. Winning this award is fantastic as it serves to highlight all of the great work our Conscious Capital Forum are doing on top of their day jobs.”

Anthony Long, Group Chairman and leader of the Group’s Conscious Capital Forum said:

"Becoming a Net Positive business and investing heavily in sustainable projects over the last few years has been immensely rewarding for everyone in the business. Our four key themes of Responsible Investment, Financial Wellbeing, Community Impact & Climate Change touch all our stakeholders both inside and outside the business. I am immensely proud of everything that we have achieved, and it is wonderful to see this work recognised through the UNESCO Biosphere awards for the second year in a row."

If you’d like to find out more about Capital International Group’s Conscious Capital initiatives, click here

Disclaimer: The views, thoughts and opinions expressed within this article are those of the authors 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