Q4 Investment Update – The worst of times

2022 was not the worse year for shares but it was the worst year for bonds and it was the worst year for shares and bonds combined since records began in 1871. This is shown vividly in the 8th chart in this chart-set from the data team at the FT covering the events of 2022.

As we have said in the past here as well as several other places, the world has become addicted to cheap money and this couldn’t last for ever. 2022 was the year when the music stopped and several investors found themselves unable to find a chair.

For the last decade plus, central banks have been printing money. This cheap money has been flowing around the global economy, boosting all asset values. In response to rising inflation, only partly caused by the first European war for decades, 2022 saw a raising of interest rates and a slowing of money printing. Monetary policy has been swiftly tightened in the US, Europe and the UK. China and Japan being the notable exceptions to this policy reversal. In the UK alone, the Bank of England has raised interest rates 7 times in the last year but probably can’t go much further given the current cost of living crisis.

Globalisation has gradually lifted a huge number of the World’s poor into the middle class. Not everyone has agreed with the concept (the target is sometimes ill-defined and more likely to be an objection to neo-liberalism) and protests against globalisation have flared up every decade in various forms. 2022 saw the first potential reversal of the globalisation macro-trend. China’s extreme Covid lockdowns (in the face of a domestic vaccine that doesn’t seem to be performing as well as western ones) have caused major industrial disruption and with the ongoing war in Ukraine, have led many countries to ‘onshore’ their supply chains.

The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades.

Larry Fink, Blackrock CEO (2022 Chairman’s letter to investors)

Re-shoring, on-shoring or near-shoring your supply chains is likely to push wages higher for Western consumers, which many will argue is long overdue but is also likely to feed into inflation. In this kind of environment is it likely that quality companies with solid balance sheets and good profitability will be the ones to thrive. The other class of winner is likely to be companies that are working on solutions to the rapidly growing problems of climate change. Company boards are starting to have to report, not just on their ESG credentials, but also on the very real risks that climate change presents to their businesses.

If 2022 taught us anything, it is that bonds protect against share price volatility – until they don’t.

Our investor mantra remains; invest as much in equities as you can stomach, reduce tax, reduce costs, plan out your future, don’t look at your portfolio valuations and ignore all investment updates.

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