2022 was a traumatic year for financial markets – but this is something we are getting used to. Fixed income markets were the main casualty with both government and credit bonds taking a battering.
Equities were down significantly in many markets – with growth stocks, particularly in tech, bearing the brunt of the sell-off. Property was the outstanding feature of the first half of the year but the rising cost of money led to valuation falls from September onwards. Industrial assets, the darling of the property world in recent years, went into especially sharp reverse. Alternative assets were not a safe haven with their illiquidity being evident during the mini budget crisis. Too much money chasing similar strategies – hardly what alternative assets were meant to do. Cryptocurrencies were intermittently in the headlines as various players blew up. Corporate activity slowed down a lot – with big consequences for bankers’ bonuses and, indeed, the numbers required to play corporate snakes and ladders.
I spent Christmas Day with family members in Cheshire. Our conversations were wide ranging: Traitors (the TV show), thoughts on Rishi Sunak, will train travel ever return to normal, what needs to change in our health system, Traitors (again), Messi and the World Cup, bureaucracy and its impact on everyday life, and the price of milk (I guess that one is specifically for dairy farmers).
Whilst putting the world to rights we discussed what had changed during my time in the City. One thing is evident to me. In the mid-1980s the UK was on the up. We had global leading companies, there was an entrepreneurial spirit and a ’can do’ ethos. Some of this was channelled in the wrong direction with disproportionate rewards for good fortune (some utility bosses fall into this category, the forerunners of housebuilding bosses). In equity markets this spirit was represented by UK companies looking to expand in Europe, America and even Asia. Equity valuations were on a par with global competitors and shares could be issued for acquisition purposes. In 1985 the FTSE100 was at a similar level to the Dow Jones index. Then things started to go wrong for UK equities. Governments panicked over Maxwell, tax changes reduced the attractions of shares, pension holidays became popular, regulation was generally tightened. So, we saw a significant shift away from equities to bonds from the late 1990s. Over time the equity dividend yield discount to government bonds (reverse yield gap) became a yield premium. UK companies became the prey rather than the predator. Money was channelled to government bonds – that could have been used more productively elsewhere. Great for governments if they used this good fortune well; bad for taxpayers if it was squandered. At the close of play in 2022 the FTSE100 is at 7,475 whilst the Dow Jones is above 33,000.
The great question we have to address as a society is how we are going to get productivity growth to a level that can sustain the rising living standards we have come to expect. On present trends it looks extremely challenging.
As usual, the last week of the year was a bit of a non-event with little economic or corporate news. However, bond yields have remained under pressure. German 10-year yields breached 2.5% whilst equivalent US treasuries moved above 3.8%. In the UK 10-year yields ended at 3.7%, a rise of 60bps in December. Real yields also rose, but by less, giving rise to an upward move in implied inflation. Credit markets were relatively quiet: high yield spreads moved out but sterling investment grade saw a small tightening over the week.
So where does that leave us for 2023? I have found myself becoming progressively more pessimistic on global growth prospects. The end of cheap money will have further economic and market consequences and geopolitical risk is on the up. My view is that the slightly better economic data and more upbeat tone is a false dawn. Things are going to be tough this year. I like investment grade debt where investors are well paid for risk and I prefer shorter duration strategies as I think that impact of the weight of government debt issuance on yield levels is being underestimated.
From a personal perspective I have confidence in our investment approaches and the evolution of leadership. We have highly skilled analysts and fund managers who have undertaken research and managed portfolios in many different economic and market scenarios. I think that experience will really count in 2023.
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