During the last few weeks of the year, the prospect of rising interest expectations continued to grip markets as the soft landing/rapid disinflation thesis was tested. Tight labour markets in the US have firmed the case for tighter monetary policy and in that sense, it was perhaps not surprising to see a continuation of the dominant trends of 2022 where interest rate sensitive tech stocks took the brunt of the selling while value and ex-US stocks were more resilient.
That left markets down for the month and more or less level for the quarter with value managers in the main staying positive territory while growth strategies suffered another violent leg down.
Looking at the year as a whole the differences are even more stark with the Nasdaq and most of its blue-chip high-flyers having lost a third of their value while the old eco money stocks of the UK’s FTSE 100 actually rose in value. Australia, once more the ‘lucky’ beneficiary of global trends (Ukraine’s misfortune in this case) was only slightly down. Europe and Japan suffered more modest falls while the mighty S&P 500 and China centric emerging market indices level pegged at almost -20%. The big story though was rising interest rates and the resultant double digit falls in value of the highest-grade fixed interest government bonds.
With the year ending as it had begun perhaps the most interesting thing about the last few weeks was that even though US tech stocks were the biggest losers it was other bond markets outside the US that provided the impetus. Early in the quarter it was the UK bond market that came under pressure (for reasons that seemed very specific at the time). Then, just before Christmas it was the turn of the Japanese Government Bonds (JGB) as the central bank attempted to get ahead of the imminent realisation by market participants that even the modest inflation that the Japanese are experiencing might be enough to threaten the longstanding regime of (downwards) Yield Curve Control (YCC). More recently European yields (and even German Bunds) haver spiked and the discount of Australian long term bond rates to their US counterparts has started to narrow.
These look like subtle moves of 0.3-0.6% but the amount of debt issued in recent years makes them influential and nowhere has this been more evident than in equity markets, or more specifically in the divergence between the performance of growth and value strategies or, very similarly, US stocks vs the rest of the world. Just when those that had pinned their hopes on technological disruption thought that the worst was over, the selling pressure started again in the last few months meaning that by the end of the year some fairly mainstream growth investors had seen their portfolio values halve overt the year while more staid value managers remained in positive territory. The price action of the last quarter also means that much feted COVID lockdown beneficiaries have now done a full round trip with many below their pre-COVID levels. Meanwhile erstwhile bricks and mortars laggards now look pretty respectable over 3 years.
Market Returns – 1 Month to 31 December 2022 (in AUD)
It always feels like a new beginning in January but rarely does the spectre (or perhaps hope) of a decadal regime change seem so auspicious and so we are less cynical than usual of the annual forecast-fest and the biggest January project for us will be formalising these thoughts in our 2023 outlook.
Our process usually lends itself to a gradualist view of Strategic Asset Allocation (SAA) as we effectively do this every quarter, or when markets give us a better reason, and we often rail against the view that one should do this in an overly contrived manner on the 30th of June or 31st December.
However, this is the first time in over a decade working together that we all agree that this is probably a good time to be thinking about the possibilities of the next 12 months and the probabilities of the next decade, knowing that there is a good chance that the die is set for the next 10 years in the next 12 months.
With all that in mind, our priority up until Australia Day will be to triangulate between Hunt Economics and the fund managers we work with and then condense this into a view with both an open mind and a sense of purpose.