In December, sentiment turned once again and financial market participants came to the realization that the ongoing global tight monetary policy and the increasing risk of recession offer little encouraging prospects for risk assets. In the case of equities, it was primarily growth stocks in the USA that were sold off. In addition to the US Federal Reserve, the ECB, the Bank of England and the SNB also raised interest rates by 50 basis points and signaled further rate hikes. ECB President Christine Lagarde stressed that interest rates still need to rise significantly and steadily to reach the medium-term inflation target of 2% and that a recession in 2023 is likely to be short and mild. It is rather rare for central banks to talk openly about a coming economic slowdown, but by now even the Federal Reserve openly considers a U.S. recession possible because of its continued fight against inflation. A significant cooling of the economy would only serve the central banks' mandates - also, historically, such high inflation has never been tamed without a sharp recession. Economic data in the U.S. still point to a tight labor market and give the central bank little room for loose monetary policy, especially if inflation continues to persist above wage growth. For Western central banks, the situation is now complicated by the fact that, after a long wait, the reopening of the Chinese economy is more likely to increase inflationary pressures again worldwide. In December, the party leadership decided on further easing measures. However, the country is currently plagued by a fierce wave of infections and a recovery is therefore likely to be very delayed from Q2 2023 at the earliest. Should monetary policy in the West pause at the same time next year or even be eased again depending on the recessionary damage, a good equity environment would emerge for developing countries such as China, Brazil, India and others. Even more so because these countries have suffered from the strong USD over the past year. A review of asset classes shows a clear divergence in equities by region, sector or style. It also becomes clear that there was hardly any safe haven, which was value-preserving for a diversified global portfolio. Supposedly safe bonds sometimes lost as much or even more than stocks (see Focus). As a Swiss franc investor, you were also exposed to a stronger franc, with all currencies except the USD losing significant value against the franc.
Despite the turmoil on the equity markets, implied volatility (as measured by the CBOE VIX index) remained relatively and astonishingly low, even clearly relaxed. The larger swings took place at the beginning of the year due to the turnaround in interest rates and the war in Ukraine - after that, calm returned and the "fear barometer" is currently quoted at a low 21 (values above 40 speak for panic) despite the disastrous picture for stocks. After the Nasdaq Index was always among the best stock indices for years, the picture turned around significantly in 2022. In a year-on-year comparison, it is hard to find a relevant barometer that has lost more ground. The former technology darlings such as Amazon.com, Meta Platforms (Facebook), Alphabet (Google), NVIDIA or Microsoft and Apple are among the biggest losers among the large-cap stocks in 2022. Having profited massively from the pandemic, the technology giants now seem to be struggling with overcapacity and are currently making headlines with layoff announcements. Tesla lost over 69% of its stock market value and, with a price-to-earnings (P/E) ratio of over 26, is still valued significantly higher than the overall market. The sell-off at the automaker has accentuated as we head into the end of the year. Reports that Tesla is reducing production in Shanghai as well as that Tesla was offering more discounts in the U.S. caused this epic sell-off. This development contrasts with a euphoric rally in the previous two years 2020 - 2021 in which Tesla Inc. rose 1’163%. Such developments suggest that a speculative bubble has burst in parts of the US equity market. The Nasdaq is trading -33% lower as of 2022. In turn, the English FTSE 100 gains +2% (in local currency). The index is particularly immune to higher interest rates and commodity prices thanks to its low valuation and sector structure. Similarly, the Brazilian Bovespa has a strong commodity bias. In general, commodity and energy stocks have performed well. Given the extent of the rotation in 2022 from long-standing winners in the technology sector to oil and mining companies, it is more than legitimate to ask whether a certain "regime shift", in which the winners structurally outperform the previous leaders, is taking place. Leadership in view of the new age of "net zero" and the increased attention on the security of supply of the states makes sense.
The interest rate policy shift caused dramatic losses on the global bond markets. The interest rate level on 10-year government bonds, which is now 2-3% higher, is now dominating the bond landscape. Thus, "TINA" ("There is no Alternative"), which has caused headaches among investors for at least the last 10 years and in some cases also prompted new riskier ventures, has definitely taken its leave for the time being. The bursting of the crypto bubble (Bitcoin in USD -64%, Ethereum -67%) also fits in with this.
Despite the recent losses, USD strength has been the dominant force within the global currency structure throughout the year. Due to the US central bank's decisive action already in early 2022, it gained across the board against the G-10 currencies. The Japanese yen was the weakest. The Bank of Japan is one of the few exceptions in the fight against inflation - the key interest rate remains stable at -0.1% and until last week, the ultra-expansive monetary policy was persistently maintained. A surprise followed at the end of the year with the adjustment of the yield curve control, which allows slightly higher long-term interest rates. Also, incumbent Chairman Haruhiko Kuroda will step down as of April 2023, clearing the way for what could be a new era of Japanese monetary policy. Depending on the successor, Japanese monetary policy could thus be defined as somewhat less "easy" in the future. The potential successor, Hiroshi Nakaso, is rather skeptical about an excessively loose monetary policy.
In several respects, the year 2022 as a whole appears to be poised to deliver signs of a possible new regime. A renaissance of growth from China could provide impetus for cyclical markets and commodities, further boosting equity sectors that already performed well last year. The balance between supply and demand, especially in these volatile segments, is likely to be clouded in the short term by a rather chaotic reopening in China and a more recessionary Western economic landscape. In the medium to long term, however, these are likely to play important roles - especially in the context of climate change and the net zero targets set. The year 2022 has also revealed that "onshoring" remains more relevant than ever. Surveys of major companies have shown that the issue of value chain resilience is high on their agendas. Together with increased geopolitical tensions within the bipolar world between West and East, companies are likely to increasingly want to better diversify along their value chains in order to reduce dependencies. This is in stark contrast to the last decades of globalization, where efficiency and lower costs were the main priorities. The pandemic has highlighted the drawbacks of globalization. Provided it is a more sustained shift in thinking, this is also likely to have an impact on long-term inflation expectations (inflationary bias). The year 2022 also showed improved negotiating positions of employees, who have increasingly made their voices heard through unions in order to pursue their interests. Acceptance of US unions has reached its highest level since 1965, indicating that pressure on the wage side is likely to continue - unless a deep recession changes the balance of power more significantly in favor of employers again. From today's perspective, the following interesting investment themes are therefore likely to generate sustainable added value in the portfolio:
Climate change and net zero targets: The global ambition to bring the economy to (net) zero greenhouse gas emissions by 2050 through the promotion of sustainable energy will require massive amounts of "green" metals. Highly traded in these areas are copper, nickel, cobalt and lithium, which are essential for the electrification of the global economy. Forecasts for the demand of copper expect a strong increase (up to a six-fold increase in the coming decades). Apart from other technological quantum leaps, these metals are indispensable for the future.
Fossil Energy: For the transition phase, fossil energy sources will continue to play an important role in supply. The high energy density of these energy sources makes them indispensable and necessary in order to avoid massive growth slumps during the transition. This area is particularly interesting because, despite the price increases for oil and gas, production capacities have hardly been significantly expanded - a consequence of past mistakes and the associated financial discipline. Many companies are focusing on dividend payouts instead of developing new projects in the regulatory uncertain environment. Demand will increase for the time being despite net zero efforts - Germany has shown how difficult it is to break away from fossil fuels - since the energy transition in 1980, Germany's primary energy still consists of 77% fossil fuels. In the short term, there is also the fact that the U.S. plans to replenish its strategic reserves soon, which argues for additional support for the oil price. The geopolitical tensions between Russia and the West are additionally causing supply bottlenecks for customers from the West.
Agriculture: Agriculture plays a role in net zero efforts. If deforestation is to be stopped, more food will have to be produced in the future on the same area of land - the world's population is expected to grow to up to 9 billion by 2037 and the standard of living in developing countries will also lead to higher demand for agricultural products.
With regard to these topics, it is important to proceed with caution in an expected difficult economic investment environment in 2023. This is because the threat of recession from the USA and Europe could well provide better entry opportunities in the future - on the other hand, the large Chinese counterweight is likely to support demand again sooner rather than later. This year, we will take a closer look at the individual areas with our focus. For the newly dawned year 2023, we wish you good health and happiness.