This pattern reflected the whole of 2022 when volatility was high throughout. In the first couple of months of the year, inflation started to rise more sharply, catching out those central banks who believed it would be ‘transitory’. This was quickly followed by the appalling Russian invasion of Ukraine which caused energy and food prices to spike, and further supply constraints in manufactured goods because of China’s zero Covid policy. Central banks reacted quickly to the inflation threat and pushed up interest rates hugely from the ultra-low levels seen since 2009 to more normal levels. This caused virtually all markets to fall sharply, and simultaneously. Government and corporate bonds experienced one of their worst years since the 1970s falling by a fifth. Equities, represented by the US S&P 500, also fell by a similar amount, and the technology index Nasdaq fell by 30% year on year. Only the UK FTSE100 was positive, mainly due to the sharp fall in GBP which flattered the high level of overseas earnings in that index.
Against this highly unusual background, the GBIM Capital Preservation composite turned in a loss for the full year 2022 of -4.4%. While we don’t like seeing any losses in these portfolios, performance was better than expected given that over a third of the portfolio was in bonds (though mainly short duration). By way of comparison, UK Gilts were down over -23% on the year, and the ARC Cautious 0-40%, a UK lower risk index, posted the biggest loss in its 20 year history at -7.4%. The massive repricing of assets in 2022 produced some interesting opportunities, particularly in the areas which took the biggest beating. So, towards the end of the quarter, we lengthened the duration of the corporate bond exposure by switching within Fidelity the Strategic Bond Fund for the Sustainable Moneybuilder Bond Fund; and taking a new position in the Artemis Corporate Bond Fund (selling the Janus Henderson UK Absolute Return Fund to fund this).
Turning to the outlook for 2023, of the three big IIIs of 2022, Invasion, Inflation, and Interest rates, only the first seems intractable, and we are not expecting much change in 2023. While inflation is still high, we expect it to fall during 2023 (though not as far as the 2% consensus target) as central banks’ interest rate hikes start to bite, and the very high spring 2022 inflation data points drop out of the CPI basket calculations. This view is contingent on no ‘wage-push’ inflation becoming entrenched. Interest rates are harder to read but while we think we are close to the peak in most markets, current market expectations that rates will begin to fall as early as summer 2023 are too optimistic in our view. Central banks having got it wrong once are unlikely to risk doing so again, even if that increases the possibility of recession.
Taking a broader view, it is hard to underestimate the scale of the changes which 2022 brought to investment markets. Certainly, the easy-money policies which have prevailed since the Global Financial Crisis of 2007-09 have disappeared, causing discomfort for over-leveraged borrowers. Taking the very long view, the falling interest rate environment which began in the early 1980s may also have come to an end in 2022. It all happened so quickly that it will take some more time to tell, and, if so, what it will be replaced by.