2022 was a year dominated by macroeconomic events, with the return of higher levels of inflation and central banks in the developed world responding by raising interest rates in an effort to bring inflation under control.
As the table highlights, it was a difficult year for risk assets and risk-free assets alike. There were very few places to hide outside of bank deposits, as even gold’s decent relative returns mask a year of high volatility, with the gold price down 11% at one point during 2022.
Equities in general performed poorly, with the FTSE All-World Index delivering a -17.6% return (in US dollar terms), although the blow was softened for euro-based investors because of the dollar strengthening over the year.
A -32.5% return from the NASDAQ in 2022 reflects the formation of a bubble in unproven, unprofitable technology stocks – likely fuelled by years of monetary largesse from central banks, and large rounds of fiscal stimulus from the government. These stocks landed hard this year as higher interest rates, uncertainty, and inflation, forced investors to more highly prize existing cash flows and profits, rather than potentially high profits in the future.
Perhaps the nastiest surprise came from what is supposed to be a source of stability in investors’ portfolios – government bonds. An investor in European government bonds would have earned a negative return of 18.2% in 2022. Even inflation-linked bonds, which are supposed to protect an investor against the risks of inflation, produced a negative return of -9.7%. Quite simply, all government bonds were priced for zero interest rates, so there was no upside, only downside. And there’s likely more downside if interest rates keep rising.
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