Sabco® Investment's Monthly Market Report - December, 2022

Sabco® Investment's Monthly Market Report - December, 2022

2022 proved to be an exceptional year for investors, with significant challenges and surprises. The surge in inflation compelled central bankers to shift their stance after years of accommodating monetary policies. This had a notable impact on both equity and bond markets, which remained under pressure throughout December due to continued aggressive actions by central banks.

Despite indications of easing inflationary pressures, central banks surprised the markets in December with a more restrictive outlook on monetary policy. This reversal countered the positive momentum that had emerged from improved inflation figures in the US, leading to a decline in stock prices. Consequently, December mirrored the overall performance of the year 2022.

European stock markets outperformed their US counterparts in December, with relatively higher valuations and a greater influence of growth stocks in US market indices. The US market, therefore, exhibited greater sensitivity to the interest rate outlook. However, European stock markets managed to close the year by narrowing the performance gap with the US, thanks to a strong performance in the last quarter. In contrast, European markets had initially underperformed due to the war in Ukraine and the energy crisis. Emerging markets displayed a mixed picture in December, with positive performance in Eastern European markets but negative performance in Latin America. This divergence was the opposite of what was observed in the early months of the year. The Chinese stock market experienced a robust December following the Chinese government's shift in its zero-Covid policy. However, the overall performance for the year remained exceptionally weak.

In both the US and Europe, value stocks outperformed growth stocks significantly in December, continuing the trend that had prevailed throughout most of the year.

At the beginning of 2022, the German 10-year rate was still negative at -0.15%, while its US counterpart stood at 1.5%. Amidst supply chain disruptions and inflationary pressures caused by the pandemic, the Russian invasion of Ukraine further elevated energy and food prices. Most central banks responded by raising policy rates aggressively to curb inflation and anchor long-term inflation expectations. The Federal Reserve embarked on the steepest interest rate cycle, resulting in the worst year on record for bond markets.

Although bond yields had eased somewhat in November due to better inflation data, they climbed significantly higher in December due to the hawkish stance of central banks. German 10-year yields jumped over 60 basis points, reaching above 2.5%, just slightly higher than the October high. US 10-year rates increased less sharply, rising by 30 basis points and remaining well below the October levels, at 3.87%.

Following a notable decline in November, spreads for both investment-grade and high-yield corporate bonds in Europe slightly narrowed in December. However, they still remained significantly higher than at the beginning of 2022.

As expected, the European Central Bank raised deposit rates from 1.5% to 2.0% in December. However, the policymakers' indication of intending to raise interest rates "significantly further" proved more hawkish than anticipated. Additionally, the central bank announced its plans to start unwinding its bond portfolio, part of the Asset Purchase Programme, at a modest pace of €15 billion per month starting in March 2023.

Following four consecutive 75-basis-point hikes, the Federal Reserve raised its policy rate by 50 basis points in December, as predicted. Chairman Jerome Powell maintained a firm stance, emphasizing that the FOMC would require "significantly more evidence" before concluding that inflation is subsiding. He reiterated the expectation of several more interest rate hikes. Fed members revised their interest rate projections upward based on higher expectations for core inflation in 2023, with the median estimate for the peak of interest rates reaching 5.1% this year, surpassing market expectations.

Japan's central bank surprised the market by unexpectedly widening the margin of tolerance around its yield target of 0% from 0.25% to 0.50%. The policy rate remained unchanged. This adjustment in the Yield Curve Control Target may suggest a gradual shift away from the target, but it is not necessarily an indication of higher policy rates in the near term.

In addition to the Federal Reserve, the ECB and the Bank of Japan, several other central banks (including those in the UK, Switzerland, and Norway) were also active in the past month. The ECB's more restrictive comments prompted the market to revise its expectations significantly, with peak policy rates now anticipated to surpass 3%, well above previous estimates. This led to a strengthening of the euro against most other currencies. For example, the dollar weakened by almost 3% against the euro in December, although it remained 5.8% higher than at the start of 2022. The Japanese yen managed to strengthen against the euro following the Bank of Japan's decision.

The commodities market experienced volatility throughout 2022, influenced by geopolitical tensions and rising concerns of a global recession. December was no exception. Following a sharp decline in November, Brent oil prices remained relatively stable overall in dollar terms. Market fears regarding the impact of rising recession risks on demand, coupled with the G7 countries' introduction of a price cap on Russia's offshore oil exports, limited any significant price increase. European natural gas prices plummeted to 70 Eur/MWh, the lowest level since the Russian invasion of Ukraine. The EU established a ceiling (180 Eur/MWh) for Russian gas, but its impact is expected to be minimal due to the high cap level and preconditions before it takes effect. Milder weather and a seasonal decline in industrial demand contributed to the price drop, coinciding with relatively high storage levels.

Industrial metals maintained stability in December but experienced an overall decline throughout 2022, despite a significant rebound during the early months of the year. China's reopening and its position as a major consumer of industrial commodities provided support in December, although global economic growth concerns counterbalanced the positive impact.

Gold prices strengthened in December, ending the year virtually unchanged in dollar terms. However, the interest rate environment remained unfavorable for gold during the past month. Supporting factors included a weakening dollar and potential purchases by non-Western central banks (such as China and Russia) diversifying their reserves away from the dollar, alongside persistent geopolitical risks.