Market Overview

Summary of world markets in December

Global equity markets ended 2022 in negative territory as investors took stock of a torrid year and looked ahead to the prospect of slowing global growth and persistent inflationary pressures. During December, central banks raised interest rates in the US, the eurozone, the UK, Canada, Switzerland, Mexico and Norway.

China announced an easing of its strict Covid-19 restrictions, raising ho pes that the country’s economy would reopen fully, but also triggering concerns that the move could spark a fresh wave of infections around the world.

December saw the Bank of England (BoE) announce its ninth consecutive increase in interest rates. The key base rate was raised by 50 basis points to 3.5%, although there were signs of dissent among BoE officials, with two voting for no change and one calling for an increase of 75 basis points. UK inflation moderated in November as energy cost pressures eased slightly. The annualised rate of consumer price inflation declined from 11.1% in October to 10.7%; nevertheless, prices are still rising at their most rapid rate for more than 40 years.

The FTSE 100 Index and the FTSE 250 Index both fell by 1.6% during December. Over 2022 as a whole, however, their performance was markedly different: the blue-chip FTSE 100 Index edged up by 0.9%, while the FTSE 250 Index – which tends to be more exposed to the domestic UK economy – fell by 19.7%. The pound weakened against the US dollar over 2022 as a whole, falling from US$1.35 to US$1.21. The outlook for sterling remains clouded by expectations of further monetary tightening in the US and the eurozone alongside recession in the UK.

The Government unveiled plans during the month to reform the UK’s financial regulation. The “Edinburgh Reforms” – a package of more than 30 measures – are designed to support innovation, “unlock investment and turbocharge growth”, and cut red tape in the financial sector. However, some critics believe that the moves could undermine some of the lessons learned from the Global Financial Crisis.

Although the UK economy grew by 0.5% during October, its performance over the third quarter of 2022 proved worse than first estimated as inflationary pressures continued to curb activity. The Office for National Statistics reported that the economy contracted by 0.3% during the third quarter, rather than by 0.2%, with falls across the manufacturing sector. The UK economy is now calculated to be 0.8% smaller than it was before the Covid-19 pandemic.

Sales volumes rose at a “moderate pace” during December compared with the same period in 2021, according to the Confederation of British Industry (CBI). However, the CBI’s survey found that retailers do not expect sales growth to continue into the new year.

The Federal Reserve raised its key federal funds rate for a seventh time last year to a range of 4.25% to 4.50% but moderated the pace of its tightening by implementing an increase of only 50 basis points, rather than the 75 basis points seen in the previous four rises. Inflationary pressures in the US continued to ease during November, falling from 7.7% year on year in October to 7.1%. The Dow Jones Industrial Average Index fell by 4.2% in December and by 8.8% over 2022. Meanwhile, the S&P 500 Index fell by 19.4% over 2022, experiencing its worst calendar year performance since 2008. Elsewhere, having finished 2021 at 1.51%, the yield on the ten-year US Treasury Bond ended 2022 at 3.8%.

The European Central Bank (ECB) raised its key interest rate by 50 basis points to 2% and intends to start cutting its balance sheet by €15 billion per month between March and June. Policymakers warned that they expect to continue to tighten rates “significantly” in order to dampen inflationary pressures; inflation is expected to remain above the ECB’s 2% target until 2025. ECB President Christine Lagarde commented: “We’re not slowing down. We’re in for the long game”. The Dax Index dropped by 3.3% in December and by 12.3% over the year.

The yen rose to its highest level against the US dollar since early August during December following the Bank of Japan’s unexpected adjustment to its yield curve control policy. The central bank opted to widen the range within which long-term bond yields are allowed to move from 25 basis points on either side of its 0% target to 50 basis points. The Nikkei 225 Index fell by 6.7% during December and by 9.4% over 2022.

Whilst AM&A’s active multi asset Model Portfolios underperformed against their benchmarks in December, they outperformed their respective benchmarks by an average of 27% in 2022.