Markets end the year with a down month…

Following up months in October and November, December proved a down month for equities and bonds closing out what has been a difficult year for investors.

2022 proved to be a volatile year in equities

Global Equities (local currency)

Recap on 2022:  a pivotal year where much changed.

  • After years of no or low inflation, inflation shot up in most countries and peaked at over 10.6% in the EU area.
  • Most of the world started the year looking forward to a boost to communities and economies as we emerged from the global pandemic of Covid-19. Instead, Russia’s invasion of Ukraine on the 24th of February led to an energy crisis, threatened food security, further exacerbated the inflation problem and contributed towards the slowing of the world economy.
  • Central banks reversed monetary policy from being very accommodative (since the 2008 financial crisis) to tightening. They raised interest rates aggressively and stopped (or announced plans to stop) buying bonds and other asses. This more restrictive policy reduced liquidity in investment markets at a time of increased uncertainty and slowing economic growth.
  • Fractures appeared in areas of the financial market. First it was the rapid rise in UK rates causing issues for UK defined benefit pension schemes which ultimately required the Bank of England to step in. Then we saw the unraveling of the cryptocurrency market. The collapse of FTX and other entities highlighted how significant parts of that market lacked real substance. Bitcoin fell in value from a peak of $67,000 per bit coin to $17,000.
  • Economies slowed and yet labour markets remained strong. The latter is proving a problem for Central Banks who need labour market tightness to ease – to help bring down inflation.
  • China remained an outlier for most of the year in its approach to Covid-19 until December when it abandoned its zero-Covid policy with the result that the country in now dealing with a major Covid outbreak.

Our Investment Outlook

At this time of the year most assets managers and other professional forecasters produce their annual outlook statements. As we wade through these, there appears to be broad consensus that 2023 will be a tricky year for economies.

  • Headline inflation will fall during 2023. However, core inflation will likely prove sticky and well above central bank targets.
  • As a result, central banks will continue to raise interest rates even in the face of slowing economies.
  • There is broad consensus among professional forecasters that economies will slow further in 2023 with many dipping into recession. The IMF’s most recent forecast is that a third of the world will be in recession this year.
  • However, we note that there are some mixed signals. For example, labour markets remain tight complicating the lives of policy makers who need a softer labour market in order to control inflation.
  • Slowing economies, at some point, translate into reduced earnings for companies. So, we expect pressure on company earnings to show up in the first half of this year.
  • The change in Central Banks policy stance from Quantitative Easing (QE) to Quantitative Tightening (QT) reduces market liquidity and increases the risk of market fractures.
  • After abandoning their zero-Covid strategy, we should see significant improvement in China’s economic numbers later in the year. A key question for this year is how China’s reopening will impact global growth and energy prices.
  • Ukraine and other geopolitical risks remain significant with bad outcomes not currently priced into markets. The core assumption of markets at the moment is that the Ukraine war will not end any time soon.
  • Overall, markets are likely to remain volatile until there is more certainty around (a) core inflation falling back to the target of 2% and (b) the depth and length of economic slowdowns / recessions.

For short-term investors, this is not a market to be in but for our clients who are long-term investors, we continue to advise them to follow their plan and use market weakness to build on positions.

Other notes of interest

Interest rates rose again in December

As expected, the Fed, ECB and the Bank of England all raised interest rates by 0.5% in December.

Interesting Data Visualisation

I am a big fan of data visualisation. Given the focus on slowing economies the following visualisation (courtesy of shows the importance of the performance of the three large areas of Europe, US and China.

Significant Scientific Milestone in Fusion Technology

One of the more significant announcements in December was from the science industry. The prospect of being able to generate clean energy from nuclear fusion hit a significant milestone when the energy output from an experimental reactor exceeded the input by some 50%. While we are still decades away from this becoming part of the solution to our climate challenge, it will provide a rationale for further private and public investment in this area.

John Tuohy is Chief Executive of Acuvest, an Irish-owned, independent advisory firm specialising in wealth management, pensions, and investment advisory services for individuals, companies, pension schemes, charities, and institutions. John is a Chartered Financial Analyst (CFA) and a Fellow of the Chartered Association of Certified Accountants.