Chris Ralph, Chair of The Big Exchange Investment Committee gives you a rundown of what happened in 2022 and what to look out for in 2023.
While 2021 was the year coming out of the pandemic, 2022 started off very differently and became a tough year for many people and investors alike. After seeing out the end of a major pandemic, the world reeled from news of Russia invading Ukraine kicking off a European war and soaring inflation creating a cost-of-living crisis.
Early volatility in the year set many sustainable, impact, and responsible style funds onto the back foot. Those funds with a higher exposure to technology companies (usually reported to have lower carbon footprints at a company level) and lower exposure to traditional energy sector companies (commonly excluded for their involvement in the production and/or distribution of fossil fuels) lost ground in the early part of the year as oil prices rose. For many funds, it meant that, for the rest of 2022, they were playing catch up with the rest of the market..
Fixed Income funds, which are generally understood to take on less risk than equity funds, also performed poorly and did not provide the support to traditional equity-bond portfolios that one would normally expect when stock markets fall. Interest rate rises and inflationary pressures caused bond yields to rise and prices to fall which is unusual in most historic equity market downturns.
So, all in all, a lot of things that could go wrong for a balanced investor in 2022, did. However, investing is for the long-term and for 2023, there is some potential for good news. At lower valuations, there is an opportunity for investors to enter the market at attractive entry points to aim for long term growth.
Although rising inflation was the primary economic concern last year, it is expected that pressures will abate through 2023 in particular because the prices of oil and gas have fallen sharply from the peaks of 2022. Nevertheless, wage inflation may continue to exert a burden as workers try to bargain to recover the drop in real earnings power that rising prices have created.
It is therefore likely that some leading economies may experience little or no growth or even recession, although it is encouraging that the International Monetary Fund is more optimistic in its most recent report than it was last year. It forecasts that global GDP will increase by 3.2% in 2023 as China emerges from its Covid lockdown and bounces back; that the Indian economy will continue to prosper after a deeper than expected slowdown in 2022; and, that the more advanced economies will most likely avoid recession (with the UK forecasted to shrink 0.6%).1
Even though there continue to be geo-political concerns – the war in Ukraine and tensions between China and Taiwan to name two – in other respects this creates opportunities for companies as investment in new technologies to support the transfer to a greener global economy and the move away from dependence on Russia supplying a significant proportion of the inputs to energy in many countries as well as shifts in supply chains, for example the re-positioning of factories in the semi-conductor industry, support growth ambitions.
Investors who are prepared to look to the longer term may benefit from a more attractive entry level given the fall in equity and bond markets last year. Therefore, even if there are some short-term setbacks, the value on offer in many investments today could present a good opportunity for patient investors.
Sources:
1 IMF World Economic Outlook Update. January 2023
This article isn’t personal advice and if you’re still really not sure whether an investment is right for you, please seek independent financial advice. All information was accurate at the time of publication.
Please remember that when investing, making money is not guaranteed and your capital is at risk. The value of your fund can go down as well as up. Tax treatment depends on an individual’s circumstances and may be subject to change.
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