Quarter 4, 2022 Market Commentary

• Published on January 9th, 2023

Quarter 4, 2022 Market Commentary

Past performance is not indicative of future results. The information mentioned is for illustrative purposes and should not be considered a recommendation to buy or sell.

Stock markets ended a tumultuous year with gains in Q4. Asian shares were boosted by China's relaxation of its zero-Covid policy, while European equities also advanced strongly. Government bond yields edged up towards the end of Q4, reflecting some market disappointment as major central banks reiterated plans to tighten monetary policy despite signs of peaking inflation. Commodities gained in the quarter, led by industrial metals.

US

US equities made robust gains in Q4, with significant progress in November. Investors balanced ongoing caution from the Federal Reserve (Fed) with indications that the pace of policy tightening would slow and signs that elevated inflation could be cooling. There were also strong corporate earnings in certain sectors.

Annualized Q3 GDP for the US was confirmed at 3.2% in December, stronger than the second estimate of 2.9%. Unemployment remained at 3.7%, with 263,000 jobs added in November—the lowest number since April 2021. The latest consumer price index (CPI) for November showed inflation slowed to 0.1% month-on-month, but remained elevated at 7.1% year-on-year. The Fed's final rate hike of the year was a pared-back 50 basis points (bps) rise after four consecutive 75 bps increases, but the policy rate is expected to continue climbing in 2023.

Most sectors rose over the quarter, with energy stocks posting especially strong gains. Consumer discretionary was a notable exception, with Tesla's decline significantly impacting the sector.

Eurozone

Eurozone shares advanced strongly in Q4, outperforming other regions. Gains came from various sectors, notably economically-sensitive areas like energy, financials, industrials, and consumer discretionary. More defensive parts of the market, such as consumer staples, lagged behind.

Equity gains were supported by hopes that inflation might be peaking in Europe as well as in the US. Annual inflation, measured by the harmonized consumer price index, fell to 10.1% in November from 10.6% in October. The European Central Bank (ECB) raised interest rates by 50 bps in December, a slower pace than previous 75 bps hikes. However, ECB President Christine Lagarde warned that rate increases would continue. The ECB also confirmed plans to stop replacing maturing bonds.

Data showed that the eurozone economy grew by 0.3% quarter-on-quarter in Q3, slowing from 0.8% in Q2. Forward-looking indicators pointed towards contraction, although the rate of decline moderated. The composite purchasing managers' index (PMI) for December was 48.8, up from 47.8 in November. Falling gas prices, due to unusually mild weather, helped alleviate some cost pressures.

UK

UK equities rose over the quarter, helped in part by the country emerging from its September crisis. Markets had been volatile in September due to the former prime minister and chancellor announcing significant fiscal stimulus with little detail on funding. Most policies from the September 'mini-budget' were reversed, and the new chancellor, Jeremy Hunt, used the Autumn Statement in November to promise fiscal tightening. His message was supported by economic forecasts from the independent Office for Budgetary Responsibility (OBR).

Rishi Sunak, with his fiscally conservative reputation, became the new prime minister, stabilizing gilt yields and interest rate expectations. The Bank of England's decision to reduce the pace of interest rate hikes also supported domestically focused areas of the UK equity market.

Economically sensitive areas outperformed, driven by hopes that the US Federal Reserve might pivot to cutting interest rates in late 2023.

Japan

Japanese stocks rose in Q4, with a total return of 3.3% in yen terms. The yen strengthened against the US dollar from November, reversing its trend from most of 2022.

Most Japanese companies reported strong quarterly earnings for the July to September period, particularly benefiting from yen weakness. Confidence among company managements was high, as evidenced by record share buybacks announced this fiscal year.

The Bank of Japan (BoJ) made a surprise decision to widen the band within which it maintains 10-year bond yields, signaling a potential first step towards policy normalization. This drove a sharp strengthening of the yen in December.

The government assembled a substantial fiscal package in Q4 to bolster the domestic recovery in 2023. International travel restrictions were lifted on October 11, and the visa-waiver program for many countries resumed. The domestic travel incentives program was also restarted.

Asia (ex Japan)

Asia ex Japan equities recorded robust gains in Q4, with almost all markets in the index ending the period positively. China, Hong Kong, and Taiwan saw strong growth, particularly in November, after US President Joe Biden and Chinese leader Xi Jinping signaled a desire to improve US-China relations at a meeting ahead of the G20 summit.

The recovery in Hong Kong and Chinese share prices continued in December after Beijing loosened pandemic restrictions. However, Taiwan's share price rally did not continue in December due to ongoing geopolitical tensions, higher US interest rates, and lower demand for electronic goods. South Korean shares ended the quarter positively after the central bank raised interest rates, despite a December decline due to weaker export data and cooler demand from China.

Thailand, the Philippines, and Singapore also posted strong gains in Q4, boosted by the US Federal Reserve's announcement of expected smaller rate hikes.

Emerging Markets

Emerging market (EM) equities posted strong returns in Q4, helped by a weaker US dollar. Most returns were generated in November on optimism that a slowing pace of Fed policy tightening would result in a shallow recession. Optimism faded in December when the Fed reiterated its commitment to fighting inflation. The relaxation of China's dynamic zero-Covid policy also boosted sentiment.

The Middle East markets underperformed due to weaker energy prices, with Qatar and Saudi Arabia being major laggards. Indonesia also saw negative returns. Other underperformers included India, due to mixed macroeconomic data; Brazil, amid policy uncertainty following President Lula's election; and Taiwan.

China outperformed as investors welcomed the relaxation of Covid regulations and support for the housing sector. Peru and Colombia outperformed the broader index, while South Korea and South Africa posted strong returns. South Africa was boosted by President Ramaphosa's re-election as the president of the ruling African National Congress (ANC), despite allegations of misconduct weighing on returns in December.

Poland and Hungary rebounded following months of underperformance due to the war in Ukraine. Greece and Egypt also saw gains. Turkey was the strongest index market as the central bank continued to loosen monetary policy, cutting interest rates to 9% in November.

Global Bonds

Global bond markets ended the year mixed in Q4. Government bond yields edged up towards the end of Q4, reflecting market disappointment at the hawkish tone from central banks despite slowing economic growth. The Fed raised rates twice, ending at 4.5%. The Bank of England announced two rate hikes, bringing the UK interest rate to 3.5%, while the Bank of Japan modified its yield curve control policy.

Credit spreads tightened across the quarter on improved risk sentiment. US and European investment grade and high yield credit generated positive returns, outperforming government bonds.

The eurozone faced its most challenging year for inflation, though signs of slowing headline inflation emerged towards the end of Q4. Despite this, the ECB continued to tighten monetary policy, indicating future rate hikes.

The US 10-year yield rose from 3.83% to 3.88%, with the two-year yield rising from 4.28% to 4.42%. Germany's 10-year yield increased from 2.11% to 2.57%. The UK's 10-year yield decreased from 4.15% to 3.67%, and the two-year yield fell from 3.92% to 3.56%, following the reversal of the 'mini-budget' proposals.

The US dollar's rally slowed in Q4, with the dollar index losing just under 8% but ending 2022 higher by 7.9%. Among G10 currencies, the New Zealand dollar and Norwegian Krone made the strongest gains against the US dollar. The Japanese Yen also rebounded strongly.

The convertible bond benchmark, the Refinitiv Global Focus, gained 4.0% in Q4. Convertibles, still biased towards growth, protected well against tech-heavy benchmarks like the Nasdaq but did not show traditional upside participation qualities. The primary market for convertibles remained lackluster, with overall new issuance volume for 2022 marking a record low.

Commodities

The S&P GSCI Index recorded a positive performance in Q4, with higher prices in industrial and precious metals offsetting weaker prices in agriculture.

Industrial metals were the best-performing component, with sharp price increases for nickel, lead, and copper. Zinc and aluminum prices fell. In precious metals, silver saw strong price gains, while gold's price rise was more modest.

In agriculture, coffee and wheat prices fell, while prices for sugar, cocoa, corn, and soybeans gained. Within energy, strong price gains for unleaded gasoline and heating oil offset a sharp decline in natural gas prices.