Market Review 2023: The V-Shape Scenario?
In 2022, bond and equity markets posted the worst combined performance since many decades. The war in Ukraine and central banks’ battle against inflation were the main drivers. The final quarter of the year brought some relief.
One of the most significant market moves was the sharp decline in government bond prices. The unusually large sell-off in government bonds, alongside falling stock prices, left investors with no safe haven. This was caused by central banks having to raise interest rates more than expected due to runaway inflation. Few active fixed income managers who successfully anticipated the need for interest rates to rise significantly outperformed in 2022.
Value stocks outperformed growth stocks throughout the year, which can be largely attributed to high starting valuations for growth stocks at the beginning of the year 2022 (51.2 P/E ratio for Amazon, 29.4 for Apple and 38.4 for Microsoft), growth disappointments, and the effect of rising interest rates. The valuation of growth stocks was high, with the MSCI World Growth Index trading at 31 times expected earnings, compared to 14 times expected earnings for the MSCI World Value Index. However, by the end of the year, the valuations fell to 21 and 12 times respectively. This left growth stocks looking somewhat expensive compared to historical standards, while value stocks looked fairly cheap.
On the other hand, it’s been a wild year for commodities like oil, gold, copper, lumber, and wheat. Back in February, the beginning of the Ukraine war sent commodity markets into turmoil. Commodities prices skyrocketed, with some hitting all-time highs. By spring and early summer, these prices increase really hurt many consumers—particularly oil prices, which peaked in the US in mid-June before to fell sharply during 2022Q3, A fall reflecting concerns about an impending recession.
It was different matter for Gold. The bullion decline over the past 9 months has been due to a variety of factors, including a strengthening dollar as US interest rates have risen. For example, the dollar has strengthened so much against the British pound that it has approached parity for the first time ever by the end of September (GBPUSD=1,0689). Also, The US dollar made a historic Rally to a 20-year high against most of the major currencies by the end of September with a peak of the DXY at 114. End 2022, the dollar notch a 7.9% annual gain against a basket of currencies, its biggest annual jump in seven years.
Despite some relief in the fourth quarter, 2022 will be remembered as a difficult year when markets priced in the unpleasant consequences of higher inflation and interest rates, which are likely to hit the global economy in 2023. However, with a recession widely expected and markets already starting to anticipate a decline in inflation and a peak in interest rates, 2023 could be a better year for both bonds and stocks.
The unfavorable factors encountered by investors during the year 2022, namely the war in Ukraine, inflation and slowing global growth triggered falls in the value of most asset classes. Multi-asset class portfolios delivered negative returns for private investors. The report made by ARC Research (a private banking discretionary indices provider) exhibits a double digit’s negative return for all portfolios independently from the risk category. Thus, the ARC cautious portfolio was the most performing one and returned a negative 10,5%. Indeed, even government bond that are traditionally considered as safe haven assets failed to provide capital protection.
With the fall of almost all asset classes, the notable exceptions were energy and commodities in general. Our Investment Committee has increased its exposure to commodities at the beginning of 2022 at the expense of other risky assets. In fact, the Committee has anticipated the resilience of the current inflationary environment and decided to rise its appetite for commodities, which had proven to have the highest positive correlation to inflation among all asset classes. That being said, due to its overall exposure to commodity, the investment committee missed the bull run on energy over 2022.
Another strategic decision made by BAMES Investment Committee to soften the negative effect of the macroeconomic environment was to reduce its bond duration exposure. Bonds with shorter duration being less sensitive to interest rates shifts, successive hikes in interest rates conducted by central banks in 2022 have been less costly to our portfolios.
From the equity perspective, the portfolio constructed by the investment team outperformed by nearly 13% its benchmark (S&P1200 Global). This performance was driven by a stringent discipline when selecting the sectors to bet on. Out of the 11 MSCI sectors, the team identified 4 which outperformed massively.
The decisions taken by the investments committee have enabled our Balanced Risk Model Portfolio to outperform all the benchmarks with a negative performance of 8.04% (Since inception on 31.01.2022) compared to a negative 14,4% for the ARC balanced asset. Given the likelihood of a recession in the last quarter of 2022 and first quarter of 2023, we believe that it is still unwise to overexpose our portfolio to risky assets. However, the Investments committee stands ready to redeploy a significant portion in equities that will be financed by a lower exposure to commodities. In fact, at the end of last year the committee raised its expected return (over a five-year horizon) for developed equities from 5% to 7% p.a. The good news concerns fixed income assets, since it offers once again attractive yields, which motivate the investment team to increase its long-term expected return from 1.5% to 4.5%.
Fadi Halout Chief Executive Officer
Laurent Perusset Chief Investment Officer