Q3 2022
2022 has been a highly turbulent year for financial markets so far, with stocks and bonds experiencing consecutive quarterly losses, a situation not seen since reliable index data began. The year was marked by significant volatility and challenging conditions across various asset classes.
Investors found it difficult to find safe havens, as even holding cash became less attractive due to soaring inflation, which eroded its buying power. Equities saw a decline in the third quarter, though the magnitude of the losses was not excessively large. However, the bond market, particularly sterling corporates and government bonds, experienced severe losses, leading to some bond funds recording their worst-ever losses.
Central bank policy took center stage in global markets, with investors closely monitoring and reacting to policy decisions. Most developed markets, except Japan, were tightening their monetary policies. The Bank of Japan intervened in the currency market to maintain easy monetary conditions.
UK investors holding non-GBP assets benefited from the weak pound, as the Bank of England's policies were perceived as less hawkish compared to other central banks. However, the new Conservative government's expansionary mini-budget caused the pound to fall and gilt yields to tumble, necessitating intervention by the Bank of England to ensure market liquidity.
US and global equities experienced declines, with brief respite in July. Despite the overall market losses, UK investors in US assets gained positive absolute returns due to the weakening pound. Japanese equities made gains in sterling terms but incurred small losses in their base currency. The Bank of Japan's commitment to easy policy led to record lows for the yen and significant government intervention in the currency market.
European equities, like their UK counterparts, fell during the quarter. Emerging market stocks also declined in sterling, with varying performances across countries. China saw a 15% drop, while India experienced gains and Brazil performed even better.
In a surprising turn, growth-oriented sectors outperformed value-oriented sectors in developed markets during the third quarter. However, the energy sector, traditionally considered a value sector, still performed strongly due to rising gas prices and sustained high oil prices.
Consumer discretionary stocks, including companies like McDonald's and Amazon.com, were among the top performers globally, contributing to the outperformance of growth stocks. However, the sector experienced a reversal in the latter part of the quarter, bringing its performance closer to par.
Real estate investment trusts (REITs) in the UK faced significant losses, primarily influenced by interest rate movements. Interestingly, direct property market losses were not as pronounced, indicating a faster adjustment of discount rates in the equity market compared to direct assets.
Fixed income investing suffered the most during the year, given the actions in rate and inflation markets. UK bonds, both government and corporate, experienced extreme losses in the third quarter, with gilts down 25% from the beginning of the year.
The quarter concluded with a mini-budget and soft signals from the central bank, leading to extreme market conditions that required intervention from the Bank of England to maintain liquidity for pension funds and liability-driven investment strategies.
Oil prices experienced a downward trend throughout the quarter, although they remained relatively high compared to recent history. Brent crude fell below $100 a barrel, and WTI dropped into the high $70s, but OPEC supply cuts helped stabilize prices. Natural gas prices were higher, influenced by increased demand and geopolitical factors.
Precious metals, such as gold, weakened during the quarter, while industrial metals like copper remained relatively flat. Some soft commodities posted gains, indicating an uncertain economic outlook. The UK commercial property market was weaker but not to the same extent as REITs.
While house prices remained robust, the rapid increase in mortgage rates raised concerns about potential pressure on the housing market as buyers may withdraw from the market.
