Last updated January 2023.
A year saturated in headlines broadcasting record-breaking inflation, repeated interest rates hikes, a European-wide energy crisis and the Russian invasion of Ukraine – it’s no doubt investors will be happy to see the back of 2022 – one of the toughest years for investment returns in the last half century.
However, with every storm weathered there are silver linings. In this market update we’ll take you through the results from the fourth quarter of 2022 and investing lessons to take with you for the year ahead to best position yourself for long-term positive portfolio returns.
Has UK inflation peaked?
Inflation is likely to have peaked in October at 11.1% as it fell slightly to 10.7% in November. Optimistically, it looks to be on its way down, but it is still significantly higher than the Bank of England’s 2% target, meaning that we still have a way to go before we can be confident that the BoE have it under control.
It’s too early to say if we have reached a positive turning point, however looking over to the US as a global indicator, the UK could possibly follow the same trend of decline in inflation. US inflation peaked at 9% in June 2022, and since then has come down to around 7%.
US vs UK inflation
General pressures on supply chains are easing and the price of certain goods are coming down which is helping to alleviate inflation pressures – including commodities like Brent Crude Oil, which has returned to the price it was trading at 12 months ago. And while these are positive indicators, we unfortunately can’t predict the future and there’s still a while yet before the BoE reaches its 2% target.
Are interest rate rises going to continue?
Yes, it is expected that there will be further interest rate increases in Q1 of 2023 and perhaps even Q2 – following on from the BoE increasing interest rates again last December by 50 basis points to 3.5% - making this the ninth rise in succession. Rate rises are expected to reach 4.5% before the BoE will pause on hikes midway through 2023. However, it’s not anticipated that there will be any decrease in rates until 2024. The BoE commented:
There are considerable uncertainties around the outlook. The [Monetary Policy Committee] continues to judge that, if the outlook suggests more persistent inflationary pressures, it will respond forcefully, as necessary. The MPC will take the actions necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit. The Committee will, as always, consider and decide the appropriate level of Bank Rate at each meeting.
The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment.
Asset class returns summary
Overall, 2022 was an extremely challenging year for investors with almost all asset classes ending the year in negative territory, however in Q4 we did see an upturn.
- Notably, value stocks continued to outperform growth stocks. In 2022 value stocks returned 0.99% across the whole year, but during Q4, they achieved a return of 7.82%.
Value stocks vs Growth stocks. Value investing and growth investing are two different investing styles. Usually, value stocks present an opportunity to buy shares below their actual value, and growth stocks exhibit above-average revenue and earnings growth potential. (Source: The Motely Fool, 2022).
- Large-cap growth stocks including Amazon, Apple, Microsoft had a tough time in 2022 as global investors turned their backs on overpriced big tech companies and turned towards companies with better valuations.
Large-cap stocks are valued at greater than $10 billion in the market, making them usually more stable investments. (Investopedia, 2022).
- Global property was one of the worst-performing asset classes of 2022, due to the rise in interest rates worldwide. Property ended the year with a negative return of -15.34%, and not much improvement in Q4.
- Fixed-income investments (e.g., bonds) struggled in 2022 which was slightly surprising given that this is traditionally a ‘safe’ investment. The underperformance in fixed income was driven by unexpected inflation which in turn caused central banks to aggressively rise interest rates.
Fixed-income investments. The major differences between equity and fixed-income investments are the types of securities traded, the accessibility of the markets, the levels of risk, the expected returns, the goals of investors, and the strategies used by market participants. Stock trading dominates equity investments, while bonds are the most common securities in fixed-income investments (Source: Investopedia, 2020). OpenMoney portfolios are diversified to include a mix of value and growth stocks across four asset classes – including equity and fixed-income markets – reducing risk and maximising returns by investing in independent areas that react differently to changes in market conditions.
What is the investment outlook for 2023?
Well, that’s the crystal-ball question no one can answer.
While Q4 did show signs of recovery, given the looming recession and continuing conflict in Ukraine, it’s likely that 2023 is going to be another turbulent year for investors and we encourage you to be careful not to become too optimistic and keep a level-head while markets remain uncertain. We’re declaring 2023 as the year where patience will be powerful. Investors who stay focused on the long-term without getting caught up in momentary fluctuations will see out the next 12 months with confidence and self-assurance.
Lessons investors can take from 2022
Albeit being glass half full people here at OpenMoney, we certainly aren’t naïve in realising that the last 12 months has been gruelling for investors, and we fully appreciate that it is concerning to see your investment value fall. That’s why we’ve put together key reminders to keep you focused throughout the uncertainty.
- Over the course of history there are many examples of market crashes, you only need to look back to 2020 for the last major crash – caused by the Covid-19 pandemic and global instability. We should take comfort that following every previous market crash there has always been a recovery.
- Following on from that, investments are effectively trading at a discount compared to where they were a year ago, some people look at this as an opportunity if they expect the market to recover like it always has done previously.
- Remind yourself that even the most seasoned of investing professionals could not have predicted the events from the last year. Time in market beats timing the market.
- A loss only becomes ‘real’ at the point of withdrawal, up to that point it’s simply the market valuing the assets at a lower price than what they were at previously.
As always, our advice is to sit tight and remember that investing should be a long-term endeavour. If you are an investor in our OpenMoney portfolios and have specific questions or want an honest and open chat about how your investments are performing, please reach out to one of our qualified financial advisers who can help. Either email, call or message us on Live Chat at open-money.co.uk
OpenMoney cumulative portfolio performance as of 31 December 2022
Whenever you invest, your capital is at risk and there’s a chance you may get back less than you put in.
Source: Timeline Portfolios (formerly Betafolio Ltd), 2023.