The year 2022 was marked by a series of rare and unexpected events that had a significant impact on global markets. On account of the ongoing conflict between Russia and Ukraine the unprecedented rate hikes by central banks and the commodity boom and bust, investors faced a very volatile and challenging environment in 2022.
In CY22, the NASDAQ, Global markets Ex-US (ACWX), and EM markets (EEM) were down 17-35%. Also, other asset classes like Fixed Income and REITs were down significantly.
Cross-Asset Performance | Dec '22 | CY22 | Cross-Asset Performance | Dec '22 | CY22 |
Equities | ​ | ​ | Bonds | ​ | ​ |
S&P 500 Index | -5.8% | -18.2% | Bloomberg Global Aggregate | 0.5% | -16.2% |
MSCI ACWI | -4.6% | -18.4% | Bloomberg Pan European Aggregate | -3.9% | -18.9% |
NASDAQ | -9.0% | -32.4% | Bloomberg Global High Yield | 0.7% | -12.7% |
MSCI Eurozone | -2.2% | -17.3% | Bloomberg Pan European High Yield | -0.9% | -11.1% |
MSCI Emerging Markets | -2.6% | -20.6% | Bloomberg EM USD Aggregate | 0.8% | -15.3% |
EM ex-China | -5.2% | -19.6% | VanEck EM High Yield ETF | 2.3% | -13.4% |
Bloomberg Latin America Index | -4.1% | -1.3% | ​ | ​ | ​ |
MSCI Asia ex-Japan | -0.4% | -21.5% | ​ | ​ | ​ |
MSCI China | 2.6% | -22.8% | ​ | ​ | ​ |
MSCI India | -5.7% | -8.9% | ​ | ​ | ​ |
MSCI Frontier and Select EM | -2.9% | -24.4% | ​ | ​ | ​ |
REITs | Dec '22 | CY22 | Commodities | Dec '22 | CY22 |
Vanguard US REITs ETF | ​-5.0% | -26.2% | Bloomberg Commodity Index | -2.5% | 16.1% |
Vanguard Global ex-US REITs ETF | -1.7% | -22.9% | Bloomberg Energy Subindex | -12.3% | 36.2% |
S&P Global REIT | -3.3% | -23.6% | Bloomberg Industrial Metals Subindex | 2.2% | -2.4% |
​ | ​ | ​ | Bloomberg Precious Metals Subindex | 5.7% | 0.1% |
​ | ​ | ​ | Bloomberg Agriculture Subindex | 1.6% | 15.6% |
How much of an outlier the year prior was is borne out by the fact that it was the very worst year for US bond markets in 230 years of recorded history.
For stocks and bonds falling together, it was almost the worst year in 100 years. Before this, in the US, this type of fall happened only once during the Great Depression in 1931, once during the world war in 1941, and then in 1969.
As the table above shows, all asset markets across the world, across geographies and asset classes, were a sea of red. The only assets to end up for the year were energy and a few agricultural commodities.
NASDAQ was down 32.4% and was ranked 39 out of 42 major equity indexes. The Fixed Income index, AGG was almost down 20% till Oct CY22.
Thus, CY22 was an absolute outlier year. Past statistics show that after a very bad year, we are likely to have a somewhat better year.
As we have seen so far in 2023, there are signs of stability and growth in the global equity and fixed-income markets.
Within geographies, there have been some changes with leadership moving to Europe since October 2022 which has only lately got derailed because of Banking issues.
Emerging Markets have also been doing better. We expect some European markets and select Emerging Markets such as Mexico, India, Taiwan, Brazil, and Turkey to perform well in 2023.
India, of course, was an Outperformer in CY22, which our Chief Investment Strategist, Ms. Devina Mehra had predicted at the end of 2021. India had gone into outperformance mode in 2021 after many years of under-performance both relative to its own history as well as relative to global markets. From 2010 to 2020, Indian markets compounded only about 8.5%, much lower than the long-term average of 15% odd.
Also globally, out of 42 indices, India used to be in the 24, 25, or 22 positions. So 2021 was the first year when it moved to number 13 and that proved lucky because that was in the outperformance basket and that is expected to continue. In CY22, India was at No.10, though down 4.7% in dollar terms, still outperformed by a significant margin because global aggregates were down about 18% and S&P was down about the same.
The Indian market is not at an extreme end. Extremes reverse. In the global equity market, the top three markets in CY22 were Turkey, Chile, and Brazil, which were the bottom three last year, and the top two of 2021 – Vietnam and Sri Lanka – were the bottom two this year.
So the wheel turns, while we always extrapolate what has happened recently, India is now in a sweet spot and hence, is expected to continue outperforming in CY23 as well. It will be a selective market like it was in 2022 and the sectors may not be exactly the same hence, one needs to keep a close eye on that.
In India, our systems have liked Capital goods and Industrial sectors for over a year now, and we remain overweight on this sector, although a large part of the move in this is over. Banking and Financials is a sector we had been underweight for a while but have gradually increased weightage over the 9 months. Also, we were slightly underweight in IT till December 2022 but added some more IT stocks since Jan 2023 and we are now moderately overweight in this sector. These positions have helped our portfolios outperform the markets by a wide margin of 3 percentage points in 2023 CYTD.
Despite the uncertainties and challenges facing the global economy, equity markets are expected to remain stable and offer good returns in the coming years.
We expect 2023 to be better than 2022 for fixed income as well, given the fact that we are closer to the end of the hiking cycle and that the risk/reward in terms of yields and duration is much better heading into 2023 compared to how low it was going into this year.
Overall, for equity markets, we continue to believe that the risk is in sitting it out and hence our advice is to stay invested in the market.
As always, in equity markets, you have to be patient and have a minimum 3-5 year view.