The (Asset) Class of 2022 Paul Roberts

This year has been a tricky one for many investors to say the least. At the beginning of the year the spectre of higher interest rates was emerging on the back of rising inflation and a will-it or won’t-it debate was still going on speculation of whether high inflation would be transitory. Then in February, Russia invaded Ukraine and it became clear very quickly that interest rates were most definitely going up.

Throughout the year the anticipated peaks of central bank policy rates were forecast, and then pushed higher and higher as the war continued, economic uncertainty abounded, and inflation kept hitting multi-decade highs.

Financial markets dislike uncertainty and while equity market volatility, as measured by the VIX Index, bounced around, it peaked and troughed broadly within the same range as during the previous year. However, a similar measure for bond market volatility, rose sharply during this year, at one point almost hitting the same level as in March 2020 at the start of the global Covid-19 pandemic, with the measure of volatility itself becoming much more volatile.

Bonds don’t like higher interest rates and inflation, and government bonds in many regions around the world sold-off sharply during the year, pushing prices down and yields up. The UK was a special case in early autumn as financial markets expressed their extreme displeasure at the mini budget announced by the then newly appointed Chancellor. A tumultuous couple of weeks followed, which took resignations and new appointments before a degree of calm came over markets.

Although October and November had seen some gains in bond markets, over the year to date the All Gilts Index is down around 20% and an index of corporate bonds around 15%.

Equity markets also suffered, a measure of global stocks (MSCI World) was down around 15% at the end of last month, while the FTSE All Share performed better during the year thanks in part to some of the larger, more internationally focused constituents being helped by a stronger dollar, but still the Index generating a negative return.

Property had fared reasonably well in the first half of the year according to the IPD All Balanced Index, but with the headwinds faced by the UK economy starting to bite, Q3 was a negative quarter, and the remainder of the year is likely to follow a similar trajectory.

Unsurprisingly, returns from cash were much stronger compared to earlier in the year, and with further rate rises on the cards, it is likely to stay that way for some time. While this will provide a much welcome boost to returns from shorter-term investments following years spent in the doldrums, with inflation riding high, real returns are negative.

Investing is generally a long-term game and as ever maintaining a diversified approach without over reliance on a single asset class is always sensible while trying not to focus too much on a single year, and particularly not one like 2022.

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