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