Market Opinion - December 2022

Market Opinion - December 2022

December marked a disappointing conclusion to a turbulent year for global stock markets. Most regions experienced declines, although China saw a boost from an earlier-than-expected reopening after Covid restrictions and positive shifts in government policies. On the other hand, the US Federal Reserve, Bank of England, and European Central Bank all intensified their efforts to combat inflation by implementing interest rate hikes. Widespread concerns about a potential recession continued to loom.

European equities ended the year on a negative note, despite recent positive performance. All sectors finished in the red as rising interest rates and weak economic data weighed on the market. However, there were signs of slowing inflation in Germany, Spain, and France, possibly due to government subsidies on energy costs. Although Eurozone unemployment reached a record low in October, a recent survey indicated a slowdown in hiring by businesses. Industrial production also declined as companies scaled back due to high gas and electricity prices.

UK markets also suffered declines in December, influenced by rising interest rates and fears of a recession. However, there was a slight improvement on the inflation front as it decreased between October and November. Andrew Bailey, the governor of the Bank of England, believes that inflation may have peaked, but he emphasized the need for further interest rate hikes to reach the target level. The UK economy showed better-than-expected growth in October, driven by increased car sales and a strong construction sector. However, consumer confidence remained low due to ongoing recession concerns.

US stock markets also ended December in the negative territory, making it the worst year for US markets since the global financial crisis. Inflation showed a downward trend after reaching its peak in June. However, the Federal Reserve reiterated its commitment to achieving inflation targets through interest rate hikes, albeit at a smaller scale compared to previous hikes. Rising interest rates heavily impacted the internet technology sector, with Tesla contributing to the lag in the consumer discretionary sector due to reports of production halts in its Chinese factories.

Asian markets experienced marginal losses to close out the year. While China benefited from an earlier-than-expected reopening and positive government policies, outflows from other regional markets were a result of concerns about the length of the Federal Reserve's interest rate hiking cycle. Taiwan and Korean stocks were also affected by the renewed stance on interest rate hikes, along with weakness in the internet technology sector. Indian markets ended in the red, and Japanese and Australian markets faced similar outcomes.

Emerging markets ended December with losses but still outperformed developed markets. The Federal Reserve's stance on inflation and the impact of China's reopening on growth and inflation influenced market performance. Latin America experienced the most significant lag, followed by Europe and the Middle East and Africa (EMEA), while Asia led the way. In Asia, China stood out as the top performer due to its early Covid reopening, while Indonesia and the Philippines faced losses amid the broader downturn. In EMEA, Turkey and Poland outperformed their CE3 counterparts (Hungary and the Czech Republic), while in Latin America, weakness in Peru and Mexico dragged down the overall performance, although Argentina and Colombia offset some losses.

Fixed income markets ended December in the red, with global bonds entering a bear market for the first time in 70 years. US treasuries, UK gilts, and German bunds all experienced significant declines in value throughout the year. Major central banks are expected to maintain their tightening monetary policy by raising interest rates to combat inflation and return it to target levels, which influenced the market performance in 2022. However, there was a silver lining as US consumer price inflation decreased for the second consecutive period. Corporate bonds also suffered but to a lesser extent than government securities. Sterling and European corporate indexes experienced significant declines, while the US corporate index registered smaller losses. High yield bonds ended the year with modest losses.

To summarize, December concluded a challenging year for global stock markets, with most regions experiencing declines. Rising interest rates, recession fears, and efforts to combat inflation shaped the market landscape. However, there were some signs of improvement in inflation figures and pockets of positive economic performance in certain sectors and countries.

The US stock market ended the year on a downward trend, with all three major indices - the S&P 500, Dow Jones Industrial Average, and NASDAQ Composite - experiencing declines. This made it Wall Street's worst year since the Global Financial Crisis in 2008. The technology-heavy NASDAQ was particularly affected as the US Federal Reserve reiterated its commitment to tackling inflation, leading to expectations of higher and longer interest rate hikes than previously anticipated.

During the December Federal Open Market Committee (FOMC) meeting, the federal funds target rate was raised by 50 basis points to a range of 4.25-4.50%. This move supported the Fed's efforts to bring inflation closer to its long-term target of 2%. The rate hike was smaller than the previous four hikes implemented between June and November, which were 75 basis points each. Although inflation had been declining since its peak in June, the market now expects higher terminal interest rates.

The internet technology sector faced significant challenges due to the rising interest rate environment, impacting stocks with longer durations. Apple had a disappointing end to the year, facing supply chain issues and reduced demand for its devices due to concerns about a slowing global economy and inflation.

Tesla also contributed to underperformance in the consumer discretionary sector, as the company experienced a decline in stock value after reports of a temporary production halt at its China factory, leading to concerns about demand. Defensive stocks in the utilities sector showed more resilience during the market downturn.

Asian equities experienced marginal losses in December, with positive developments in China offsetting outflows from other Asian markets. China benefited from an earlier-than-expected reopening and positive policy shifts, leading to a strong advance in Chinese stocks. The Central Economic Work Conference in Beijing focused on growth, domestic consumption, attracting foreign capital, and easing property regulations. The internet technology sector in China saw upward momentum due to the US accounting watchdog gaining access to inspect US-listed Chinese firms, removing delisting risk. Positive mobility restrictions and recovery outlooks also boosted the consumer discretionary sector.

Taiwan's equity market declined primarily due to global headwinds resulting from the Fed's firm stance on inflation, which particularly impacted the internet technology sector. Weakness in macroeconomic data, including significant decreases in export orders and industrial production, added to the downward pressure. However, consumer price inflation in Taiwan eased to 2.35% year-on-year.

Korean equities faced a substantial drop, with market sentiment dampened by the Fed's interest rate hike cycle news and renewed concerns about Covid-19 after China's reopening. Negative news flow, including concerns about electric vehicle (EV) demand, underperformance of Tesla, weakness in the gaming sector, and slowing orders for shipbuilders, also contributed to the decline.

Indian equities ended the month in the red, with all sectors experiencing declines, particularly the internet technology, energy, and utilities sectors. Macroeconomic data was mixed, with November's consumer price inflation at 5.88% and year-on-year industrial production falling more than expected in October at -4.0%. The Reserve Bank of India raised interest rates by 35 basis points to 6.25%.

Japanese and Australian equities faced downward pressure due to the Fed's aggressive stance on inflation and the Bank of Japan's earlier-than-expected revision of its yield curve control policy. However, the major iron ore players in Australia saw strength as iron ore prices increased.

Emerging market equities declined as investors assessed the impact of China's reopening on global growth and inflation outlooks, along with the Fed's commitment to tackling inflation. Latin America experienced the weakest performance, followed by Europe, Middle East & Africa (EMEA), and Asia. However, emerging markets as a whole ended the year almost flat, outperforming both developed and other emerging markets.

Bond markets delivered broad gains in November, buoyed by positive news on US inflation. The expectation of a less aggressive pace of interest rate hikes by the Fed led to a significant drop in yields on the two-year US treasury bond. This boosted confidence that the Fed would slow down monetary tightening, reflected in the Federal Open Market Committee minutes. Government bonds in Europe, including German bunds and UK gilts, also saw positive returns. Inflation data in the eurozone showed a slowdown in consumer price rises for the first time in 18 months, leading to debates about the pace of rate hikes.

In the UK, the Autumn Statement was received favourably by the market, with a downward revision of gilt sales and a combination of tax increases and spending cuts expected to impact economic activity. However, UK inflation reached a 41-year high in October, raising concerns that the Bank of England may need to take stronger measures to tackle inflation.

Corporate bond markets performed well, with gains in both investment-grade and high-yield bonds. Credit spreads for investment-grade narrowed, and high-yield credit also saw widespread gains in both European and US markets.