Market update – Quarter ending 31 December 2022

After negative returns in August and September across most asset classes, the last quarter of 2022 showed early promise with positive performance in developed market equities, emerging market debt and high yield bonds. During Q4, investor sentiment generally improved on better than expected US earnings data and an expected slowdown in policy tightening, despite inflation readings and US labour market growth refusing to budge. Coming in at a revised figure of 3.2% year-on-year (y/y), Q3 US GDP sprung back from the negative territory seen in Q2, while Q3 Eurozone GDP kept its head above water at 0.2% quarter-on-quarter (q/q) amid a harsh economic backdrop. The appointment of Rishi Sunak as Prime Minister seemingly brought the UK’s chaotic political scene to a close, while Xi Jinping broke the norm by cementing a third term as the President of China.

Global equity markets experienced back-to-back monthly gains over the first two months of Q4 as inflation pressures showed signs of plateauing. US inflation clocked a 0.4% rise in October, resulting in the smallest y/y increase since January. Even so, the economic outlook remained soft with major US companies, including tech-heavyweight Meta, revealing large scaled corporate layoffs as higher-pegged interest rates began to take their drawn-out effect on projected earnings performance. The continuation of this recovery rally throughout November was built upon the same rationale, as investors saw further evidence that would perhaps allow the US Federal Reserve (Fed) to take their foot off the brakes. Equities aside, fixed income returns were supported by lower real yields, while the US dollar saw a sharp decline against most major currencies amidst an increased appetite for risk assets.

The positive momentum seen over the first two months of Q4 did not last into December. Although job creation has fallen back and the signs of a slowing economy are evident, data showed that the US economy added more jobs than expected in November. Non-farm payrolls grew by 263,000 versus the 200,000 anticipated, while wage price growth shot up 0.6% to 5.1% y/y, adding further complications to the Fed’s task at hand. Another round of encouraging US inflation figures gave investors a short-lived confidence boost before the Fed forged ahead with ramping up the overnight borrowing rate by half a percentage point (taking it to a targeted range between 4.25% and 4.5%), while simultaneously issuing a revised ‘dot plot’ which suggested a higher terminal federal funds rate and fresh tightening to come in 2023. Despite a lacklustre culmination, Q4 registered positive returns across all major asset classes to see out the year on a slightly more optimistic note, in what has been a decidedly difficult 2022 for financial markets through and through.