Who made money in 2022?

16 January 2023

Asset markets have been on a rollercoaster ride since last January. Between January and October of last year the market was in so-called ‘risk off’ mode. Fear of recession and inflation caused investors to switch away from assets whose fortunes depend on growth and low inflation. Investors stampeded from equities and government bonds into supposedly safer assets such as cash, commodities, utilities and pharmaceuticals.

That process has gone into reverse since 1 November. Riskier assets and government bonds have benefitted from a growing perception that inflation is near a peak and that interest rates may not need to rise as far as previously expected. China has dropped virtually all COVID restrictions, boosting hopes of a Chinese rebound and an end to supply chain problems. Meanwhile growth data have come in rather stronger than expected, especially in the euro area. If you’d bought euro area equities at the beginning of November, your investment would be up by 23% today. Chinese equities have done even better, rising 46%, turbocharged by the reopening of its economy.

Expectations for inflation, interest rates and growth matter hugely for asset values. For most of last year markets were coping with higher than expected inflation and interest rates, and weaker than expected growth. No wonder investors switched out of riskier assets into cash, commodities and high-dividend equities. But better news on growth and inflation has triggered a so-called Santa rally from November that has extended into the new year.

Views vary on the sustainability of this rally. Sceptics note that valuations, especially in the US equity market, are high, that profits have further to fall and that bear markets are often punctuated by temporary recoveries. Optimists argue that markets have already discounted recessions and are now looking forward to recoveries later this year.

But as far as the real economy is concerned, the big picture is unchanged. The richer economies are in for a period of, at best, weak growth and, for many, recession.

It’s worth looking in more detail at how assets fared in 2022 as a whole, treating the equity sell-off and the post-October rally as one. Despite late gains, the big picture remains of a flight to safety. Equities had a bad year as did government and corporate bonds. Shares in smaller companies, which tend to be more vulnerable to downturns, suffered more than bigger companies.

Tech stocks had a rotten year. Meta lost 64% of its value and Amazon and Netflix about half. Cryptocurrencies were hit by the fallout from the failure of FTX and other crypto-related assets. Bitcoin fell over 60%. The big car manufacturers were buffeted by supply shortages, higher costs and the prospect of weaker growth with shares in VW and GM dropping by over 40%. Growth-dependent sectors, like real estate, travel and leisure, retail and media suffered more than less cyclical ones like pharma.

Inflation erodes the value of government bonds that had one of their worst years since the 1980s. UK gilts suffered most, losing 26% of their value last year, with the panic triggered by large unfunded tax cuts in September’s mini-budget accounting for much of the damage.

Some assets did well. The UK’s FTSE 100 index prospered, in part due to the strong performance of UK banks, up 13% in 2022, and oil and gas shares that rose by 46%. The composition of the UK equity market, with low exposure to technology and heavy weighting in banks, commodity stocks and companies with dollar revenues, enabled it to outperform. Last Friday the FTSE 100 index closed at an all-time high of 7,844. This might seem odd given that the UK is expected to drop into a deeper recession than any of its peers this year, but the index is a poor proxy for the wider economy. FTSE 100 companies derive more than half their earnings from outside the UK and the composition of the index does not reflect the composition of UK GDP. Equity valuations are, in theory, forward looking, capturing future prospects, not just current economic activity.

In currency markets the dollar was last year’s big winner, rising 5%. Investors want to hold dollars in uncertain times, especially when US interest rates are, as they were last year, rising rapidly.

And what of the future? Markets have certainly perked up since October. If inflation falls faster than expected, and growth prospects start to improve, the Santa recovery could run on. But that’s not remotely assured. It could equally be snuffed out by a rebound in energy prices, a quickening downturn or unexpected rate hikes.

Economic forecasts and market sentiment warrant close attention. As a guide to the future, they are deeply fallible.

For the latest charts and data on health and economics, visit our Economics Monitor:
https://www2.deloitte.com/uk/en/pages/finance/articles/covid-19-economics-monitor.html

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 1.9% at 7,844. UK equities performed well last week following signs that the economy may have avoided a recession in 2022 and encouraging data from the US on a further decrease in inflation.

Economics

The UK economy unexpectedly grew by 0.1% between October and November thanks to greater services output driven partly by the FIFA Men’s Football World Cup
The World Bank and IMF both warned that the global economy is on the brink of a recession as financial conditions have tightened in response to higher inflation
US inflation fell to 6.5% in the year to December, the lowest rate in a year, driven by falling energy prices; markets expect the US Federal Reserve to slow down the rate of interest rate rises to 25bp
German GDP rose by 1.9% in 2022 despite the impact of the Ukraine war on energy prices and availability, but it was a marked slowdown from the previous year’s growth of 2.6%
Euro area unemployment fell to 10.8m in November, the lowest since records began, providing further evidence of a tight European labour market
Euro area annual house price growth slowed sharply to 6.8% in the fourth quarter of 2022 after peaking at 9.2% as higher interest rates cooled housing demand
Euro area industrial production exceeded expectations, growing by 1% between October and November
770,000 UK households risk defaulting on their mortgages due to rising interest rate payments, according to the Financial Conduct Authority
Online job ads fell for the first time since the start of the pandemic, in the second week of January, pointing to a cooling of the UK labour market
Russia recorded a budget deficit of 2.3% of GDP as the cost of fighting in Ukraine drove overall military spending up by 26%, while tax revenues increased by 10% owing to higher energy prices

Business

Goldman Sachs began to lay off 3,200 workers and Blackrock announced 500 job cuts following reduced investment banking activity last year
Crypto exchange Coinbase announced a 25% cut to its workforce due to the downturn in the crypto market in 2022 and a gloomy outlook for 2023
Amazon announced it would close three UK warehouses in addition to cutting 18,000 jobs due to an increase in financial costs and falling consumer spending
Liberty Steel warned it would cut production and axe more than 400 jobs in the UK due to higher input costs
Stocks of recruiting firms Robert Walters and Page Group fell sharply last week as labour demand cools ahead of an economic slowdown in the UK
The president of Germany’s car lobby VDA, Hildegard Müller, called on the EU to proceed with US-style green subsidies to the industry to protect its competitiveness
Sainsbury’s, Tesco and Marks & Spencer Food reported profits in line with forecasts for 2022, supported by rising grocery sales last year
Homebuilders Taylor Wimpey, Persimmon and Barratt Developments announced cutbacks to new projects in 2023 following a slowdown in the UK housing market

Global and political developments

The UK government confirmed plans to supply Challenger 2 tanks to Ukraine to help the country defend itself from Russian attacks
Russian officials claimed “full control” over the eastern Ukrainian town of Soledar
Sweden’s prime minister Ulf Kristersson said that talks with Turkey and Finland over NATO membership “are proceeding in a very good way”
Fed chair Jay Powell said that the US central bank would not become a “climate policymaker” without an explicit change in its mandate
The UK government proposed legislation limiting strike action by emergency services to support a minimum service level at all times
A special counsel was appointed to investigate the discovery of classified documents found in US president Joe Biden’s residence and former office
Brazil’s president Luiz Inácio Lula da Silva deployed special forces to head off far-right demonstrations following the storming of the presidential palace

And finally… prison officers at the Pacific Institution in Abbotsford, Canada, caught a pigeon with a fashionable backpack trying to smuggle drugs into the prison - flying high

Back to News listing