Markets go up; markets go down – 2022, a Year in Review

 
For those that have followed my Brexit column on DIY Investor, and more recently Beginning to see the Light, I have a confession – Mr Bond, who provided expert commentary on all things fixed income on DIY Investor and Retail Bond Expert was actually me – writes Philip Gilbert.
 
So when the editor of DIY Investor asked if I could pen a retrospective of 2022 from an investment perspective, it wasn’t quite such a left-field suggestion; here goes….

Where to start? Post-Covid, Post-Brexit, Inflation at the highest levels for 40-yrs, and strikes resembling 1979 and the winter of discontent.

The big investment story this year has been the strength of the US$; that aside let’s start with everyone’s favourite, equities.

The FTSE 100 hasn’t gone anywhere this year, or over the last 5yrs; however, if you timed markets correctly, you would have done well. Anyone buying off that Covid-induced dip on 20th March 2020, would now be looking at a gain of C.40%.
 

‘There seems to be a general feeling of malaise, and a hard Brexit is curtailing economic growth’

 
Of course, there are dividends to be had along the way, the current yield on the Index is C. 3.6%.

Across the pond the story with the S&P 500 is somewhat different; this year the index has fallen by C.17%.

The big difference between the S&P and the FTSE comes when you extend the timeline.

Had you been invested over 5-yrs you would have made around 48%. If you had bought the dip on 20th March 2020 at 2305 your return would be C.70%.

So, what can we conclude from this. The UK really hasn’t gone anywhere for the medium-term investor; opportunists fortunate enough to call the market correctly in March 2020 would have done well.

Over the Atlantic it’s a very different story. Both the opportunist and the medium-term investor would be pleased with their results.

The other noticeable difference is the correction the S&P has undergone this year. After 10-yrs of bull markets, and with the Fed raising rates to counter inflation, this was overdue. Markets never move in straight lines, and a correction is not a bad thing; akin to everyone catching their breath before running off.

The UK concerns me; we have the same inflation issues which, by and large the market seems ambivalent to. Unless investors are adept at timing markets the market has delivered little, which feels in-tune with the UK overall; there seems to be a general feeling of malaise, and a hard Brexit is curtailing economic growth.

Covid, inflation, and the Ukraine war are global issues; however the US has a feeling of resilience, an economy able to shake off external issues and grow.

One sector that had been driving markets was tech, especially during Covid. However, year-to-date the Nadaq is down 30%; recent Q3 earnings from Alphabet, Microsoft, Meta, and Amazon have disappointed markets.
 

‘But it’s a real issue and one that will be paid for by each of us, the taxpayers’

 
Moving to bonds they have also had a difficult year, but that was to be expected with interest rates rising, and central banks beginning to unwind QE.

The latter is often overlooked, however the Bank of England is sitting on losses of C.£7bn from the bonds it purchased as part of QE. Not much has been said about this, but it’s a real issue and one that will be paid for by each of us, the taxpayers.

Closer to home the retail bond market continues to disappoint. Issuance is a distant memory although International Personal Finance did come to market with a roll-over issue paying 12%. With a coupon like that, there isn’t much more to say!

The market also saw its first default, from rugby club Wasps; quips about bondholders being stung are to be resisted! The club has pledged to continue to pay the 6.5% interest payments as it seeks to refinance, but this highlights the danger of investing without protection of the Financial Services Compensation Scheme.

A review of investments in 2022 wouldn’t be complete without mention of crypto markets which have fallen over 50% from their peak in 2021. Despite this, the crypto market cap is estimated at over $1 trillion, which mystifies me. I have yet to meet anyone who can explain what a cryptocurrency is without defaulting into jargon and displaying their own lack of understanding.

The saga of Sam Bankman-Fried and the collapse of FTX sums it up. When it came to it, his, its ‘not-my-fault-because-I-didn’t-know’ says it all.
 

‘I have yet to meet anyone who can explain what a cryptocurrency is without defaulting into jargon and displaying their own lack of understanding’

 
Also we mustn’t forget Su Zhu and Kyle Davis the founders of Three Arrows Capital which brought us the double whammy of a leverage driven hedge fund investing into crypto. Inevitably this also collapsed.

Another fashionable investment that was found wanting this year was the ARC ETF run by Cathie Wood. Last year, on the back of big bets on Tesla and crypto, she appeared to be able to do no wrong, this year the fund is down around 65%. Undeterred she still promising yesterday’s trades will come good tomorrow.

Another remarkable failure is Thurrock Council: A modest sized Conservative county-council who contrived to lose over £500m lending to Irish home builders and loan companies.

Of course no summary of 2022 would be complete without mention of Liz Truss and ‘Crazy’ Kwarteng, whose short-lived tenure as PM and Chancellor will go down in history for all the wrong reasons. Their financial statement collapsed the pound and Gilts, and almost did for pensions, too.

Estimated cost £22bn; for once words fail me!
 

‘Bumpy times ahead’

 
The bull market post the GFC is well and truly over. For many it never started. Sentiment across markets is bleak, especially with each piece of news endorsing just how dire the economic outlook is.

David Solomon, the CEO of Goldman Sachs, speaking to Bloomberg has warned that there are ‘bumpy times ahead’, as central bankers try to crush inflation without crashing economies. He continued, saying we face a ‘very uncertain time’, with monetary and economic conditions changing very quickly, which is slowing economic activity.

Goldman’s economists predict global growth will slow in 2023, to 1.9% growth.

The big question is whether central banks can orchestrate a soft landing, as they tighten monetary policy to combat inflation, Solomon warns:

‘I think that’s so uncertain. I think there’s a possibility of that [a soft landing]. But I certainly think we could see a recession in 2023 also, so I think you’ve got to be cautious and prepare.’
 
Have a Happy Christmas, and a safe and prosperous New Year – and look out for my new column.