Review of 2022

We’re unlikely to miss you

21 December 2022

3 minute read

Our Chief Investment Officer, Will Hobbs, reviews some of the ups and mostly downs of a year many of us are unlikely to miss.

2022 cemented the impression that we are indeed living through a kink in our times. War in Europe, soaring inflation and interest rates, convulsing politics, and the slow-motion implosion of a mega bubble in Chinese property all contributed to yet another turbulent and disorienting year.

However, viewed from the (hopefully) relative calm of the future, 2023 could also be the year chroniclers record the populist fever beginning to break, as various liberal democracies have appeared to take some control of their nativist challenges.

We look back on some of the highs and lows of 2022, looking for any messages for investors in amongst the strife.


For investors, it was inflation that dominated the agenda. Inflation was seen as a transitory phenomenon by most at the beginning of the year. A briefly annoying artefact left over from the pandemic. However, war in Ukraine helped to consign such confidence to the bin. A year that was expected to see around 75bps of US interest rate rises, will end up with c.450bps. This unexpected interest rate burden proved a lot for investors to choke down, as the asset class returns pay testament to (Figure 1).

Figure 1

Figure 1 is an asset return map that ranks asset classes by their annual returns from 2016 to 2022 (YTD). Rankings often change from year to year.

Data as of 23/11/2022, ATS as of September 2022. Source: FactSet, Barclays. Asset classes in GBP and represented by the following indices: Cash & Short Maturity-Bonds, Barclays Sterling Treasury Bills (0-12M) TR GBP; Developed Government Bonds, Barclays Global Treasury TR Hgd GBP (60%), Bloomberg Barclays Global Inflation-Linked TR Hgd GBP (40%); Investment Grade Bonds, Barclays Global Agg Corp TR Hgd GBP; High Yield and Emerging markets Bonds, BofAML US HY Master II Constrnd TR Hgd GBP (40%), JPM EMBI Global Diversified TR Hgd GBP (30%), JPM GBI-EM Global Diversified TR GBP (30%); Developed Markets Equities, MSCI World NR GBP; Emerging Markets Equities, MSCI EM NR GBP; Commodities, Bloomberg Commodity TR GBP; Alternative Trading Strategies (ATS), HFRX Credit Arbitrage TR Hgd GBP (25%), HFRX Merger Arbitrage TR Hgd GBP (25%), HFRX Active Trading TR Hgd GBP (25%), HFRX Systematic Diversified TR Hgd GBP (25%).

Beyond the patchwork quilt for traditional asset classes, the pull of positive real (adjusted for inflation) US interest rates was part of the force pulling the rug from under many cryptocurrencies, growth stocks, precious metals, and more (Figure 2).

Figure 2

Figure 2 is an asset return map that ranks cryptocurrencies, growth stocks and precious metals based on their annual returns from 2016 to 2022 (YTD).

Data as of 23/11/2022. Source: Bloomberg, FactSet, Barclays. Assets in USD and represented by the following indices: Bitcoin, Bitcoin/USD Spot Exchange Rate, Growth Stocks, MSCI World Growth NR USD, Precious Metals, Bloomberg Precious Metals TR USD.

However, the actual economic effects of this harsh central bank medicine have been slow to show up. Lags in the system mean that the hangover from a party many never actually managed to get into, will begin in earnest next year. The path of lagging indicators, from wages to inflation, will continue to have a say in the weight of the monetary punishment. The more price pressures refuse to lie down, the more interest rate rises central bankers may feel compelled to inflict on their charges.

To that end, we still worry for stocks in the immediate future. There are paths ahead where the worst cases are avoided. The US and global economy could dodge outright recession. Perhaps US job openings fall without a major sustained slump in unemployment. The inflation threat finally recedes and something approaching normal business resumes. However, the odds of a ‘soft landing’ appear to still be exaggerated in market pricing relative to darker scenarios.

The lead indicators are now more appreciably dimming, as we should expect given the change in monetary policy seen this year. A daunting fiscal headwind is admittedly now behind the economy, however a likely necessary rise in unemployment still lies ahead.

If that recession begins to look a bit more likely to other investors too, we should see another leg lower in stock markets, with earnings forecast cuts doing a lot of the work (Figure 3).

Figure 3

Figure 3 looks at Earnings Per Share (EPS) on a 12 month forward looking basis for the MSCI World Index.

The same applies to long bond yields as it goes, where we still feel strongly that investors are considerably overestimating how long central bank interest rates will remain at their coming peaks. It sounds ridiculous to even say it after the inflation forecast bonfire of 2022, however, sharply slower global growth and the lapping of some of the giant price hits of this year should mean inflation falls back towards target next year (Figure 4).

Figure 4 

Figure 4 is a chart of economists’ inflation expectations on a year-on-year basis in the US, EU and UK.

There are other areas where the tactical investing team currently see opportunity. However, these positions necessarily do not rely on a single outcome in the quarters ahead.

The year that broke populism?

There were some cautiously celebrating the potential breaking of the populist fever this year1. From patterns of candidate success and failure in the US midterms to the rapid collapse of Prime Minister Truss’s Conservative administration, some are arguing for 2022 as a potential turning point – a moment when the perceived madness passes, and politics can get back to being a little more boring.

Whether or not this proves to be the case, 2022 has certainly been a year which tragically demonstrated the weakness of some alternatives to liberal democracy.

The daily horrors in Ukraine continue. The depth and breadth of this European winter will be watched more closely than most in the context of the evolving energy supply constraints (Figure 5) and the implications therein for many European households.

Figure 5

Figure 5 looks at gas storage in Europe from 2009 onwards, which fluctuates on a seasonal basis.

Nonetheless, this mostly pales in significance relative to the plight of many ordinary Ukrainians as the temperatures continue to drop.

China – out of road

Even in the context of the events in Europe and elsewhere, China’s year stands out. There has simply never been a property bubble of the size that Chinese policymakers have been deliberately trying to deflate (Figure 6).

Figure 6

Figure 6 is a chart of the China Property Price Index based on prices in 70 of China’s benchmark cities, reflecting an upward trend since 1980.

The fact that this has coincided with the latest extremely transmissible variant keeping much of the economy on zero covid ice, has added significant further complication (Figure 7).

Figure 7

Figure 7 shows the number of daily new COVID-19 cases (per million people) in China since the start of the pandemic on a 7 day rolling average basis.

Images from the last few days highlight just some of the difficulties facing China’s policy makers.

The best information we have currently suggests that a sustainable reopening of the economy is likely a next year story – probably in the second quarter. Even beyond the battle with Covid-19 and growing societal unrest, the outlook is precariously perched. China’s spectacular economic success of the last few decades is heavily entwined with the growth of its giant property sector.

The next stage of development has simply never been attempted by a country of China’s size and complexity, operating under a comparable set of political and administrative institutions. Strong views should be left at the door. However, for the short term, we continue to see China and emerging market equities underperforming their developed world peers in the first part of the year. Slower global growth is a further hindrance to Asia in particular, where the global trade cycle looms so large.

Investment conclusion

2022 shall perhaps first and foremost be remembered as the year when war returned to the European continent. However, for much of the rest of the world, 2022 was defined by the cost-of-living crisis that followed. The resulting unexpected surge in US interest rates and the dollar were the wrecking balls for many diversified funds and portfolios this year.

However, for those able to invest beyond the confines of stock and bond markets, there was shelter to be found in some unexpected places. Commodities, a diversified asset class that delivered little but disappointment for much of the last decade has proven its diversification weight beyond gold. Our best thinking funds and portfolios in Barclays UK have performed impressively as a result this year. Note, as usual, that past performance is not a reliable guide to future performance.

For those looking ahead, this year has at least served to remind us that there is little point relying only on the recent past to inform you what the future might look like.

Next steps

This article does not constitute personal financial, tax or legal advice. Each person’s circumstances are different so if you're unsure about investing, you should speak to your Wealth Manager or contact us.

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