The dominant force driving 2022 market performance and investment returns was inflation. Resurgent inflation to 40-year highs led the Fed to hike interest rates by 7 times or totalling about 425 bps, to try to get inflation under control. This resulted in a cratering bond market and sending the stock into a bear market that continued into end-2022
However, by the end of 2022, relief over potential slowing in the Fed’s interest rate hikes was replaced by concerns that the economy was both currently too strong to allow inflation to come down significantly and, at the same time, that a recession looked increasingly likely in 2023.
Source: Morningstar Direct Data as of 31 December 2022 (Regional, market and fixed income indices are based on the respective Morningstar total return index. Gold, platinum and silver prices are based on the LBMA Price PM)
The 4Q22 brought much-needed relief for both global stocks and bonds. The Morningstar US market index ended 2022 down 19.4%, its biggest annual loss since 2008. Oil prices went on a round trip in 2022, rocketing to a high of US$106 per barrel in March as Russia's invasion of Ukraine limited oil supplies. Prices moderated after the summer, and oil finished in 2022 at around US$80. Cryptocurrency had a painful year as the largest, bitcoin, losing over US$550 billion in market cap or declining 64.7% as a series of crises at major trading platforms shook investor confidence.
The US dollar started 2022 on a tear, rising to its highest levels in 2 decades by 3Q22. The US dollar weakened during the 4Q22 as inflation showed clearer signs of having peaked.
The annualised returns for P04-P10 continued to track its underlying benchmark closely. As for P01-P03, outperformance was due to slightly better returns in Malaysia's fixed-income mutual funds relative to Malaysia's fixed-income index (Markit iBoxx ALBI Malaysia Total Return Index).
Total returns were higher as Ringgit depreciated by 2.1% (Since Aug 2020) and 5.1% (2022) against the USD.
We have seen a fundamental shift in the environment for 3 to 4 decades when interest rates mainly were trending down and started to reverse in 2022. Because of the reversal, correlations between stocks and bonds moved from negative to positive, implying less diversification benefits from bonds. But the good news is that interest rates have increased so much that bonds now look more attractive than they did a year ago. Whilst equity is trading at a deep discount as of the end of 2022, we still need evidence of long-term economic rebound and moderating inflation to rally back to fair value. For long-term investors who can withstand this short-term volatility, we think there is enough margin of safety in the market to use these periods of volatility to add to equity exposures judiciously
Past data and performance do not indicate future performance. Actual individual investor performance will vary depending on the initial investment, amount and frequency of contributions, allocation changes, taxes and fees during the time frame considered