While 2022 began with optimism that with the worst of the pandemic behind us the global economy could stage a strong recovery from the Covid-induced downturn, it did not take long for reality to bite.
With inflation on the rise around the world, central banks warned at the start of the year they would soon have to start tightening monetary policy. When this was followed by Russia’s invasion of Ukraine in late February – a move that created a shock not just in geopolitical terms but also in global energy and commodities markets – the tone was set for one of the worst years for equities in living memory.
Almost all the major global stock market indices suffered heavy losses, giving up a significant chunk of the gains made during a bumper 2021. Those gains had been driven to a large extent by loose monetary policy and a technology sector that had surged as a result of pandemic-era lockdowns and lofty valuations based on ultra-low interest rates. As interest rates climbed in response to high inflation, it was tech stocks that suffered the most, especially in the first half of 2022. For the likes of energy companies and miners, however, the picture was very different: the sanctions imposed on Russia drove oil and commodities prices to new highs, in Europe in particular.
Investors were also concerned about the impact of China’s ongoing Covid-19 restrictions on the country’s economy as well as on global trade. The Chinese government’s “zero-Covid” approach saw major lockdowns imposed in multiple major cities including Beijing, Shanghai and Chengdu over the course of the year before the policy was effectively abandoned following protests in November.
As the year progressed, concern shifted from rising rates to the potential economic impact of tighter monetary policy. Indicators showed that consumer demand was weakening while manufacturers and other businesses struggled to cope with rising input costs. In general, however, unemployment rates remained low. The final three months of 2022 were more positive for markets with signs that inflation had peaked, raising hopes that central banks would soon slow the pace of monetary policy tightening. However, recessions in many of the world’s major economies appear highly likely while there is ongoing uncertainty over energy prices and global trade in the wake of China’s reopening. With the war in Ukraine also rumbling on, the chances of an imminent end to recent volatility appear remote.
After leading the way in 2021, Wall Street had a far more turbulent year in 2022 with the tech-heavy Nasdaq and S&P 500 indices suffering the greatest losses. After gaining more than 25% in 2021, the S&P subsequently shed almost 20% of its value with rising interest rates causing a slump in major technology names. A global shortage of silicon chips and manufacturing issues in China did not help matters. The Federal Reserve raised rates numerous times as price rises continued to accelerate: US consumer price inflation reached a peak of 9.1% in June and remained above 7% at the year’s end. Many analysts expect the US economy to enter recession in 2023, although the labour market remains strong and company earnings to date have been largely resilient.
The London stock market was the outlier in 2022 with the FTSE 100 Index posting a small gain for the year. The FTSE was helped by its high representation of energy and mining stocks as well as the global focus of many of its companies. With sterling losing more than 7% of its value against the US dollar over the course of the year, those businesses’ international earnings became more valuable. The FTSE’s relative success should not overshadow what was a very difficult year for the UK economy, with high inflation, rising interest rates and political tumult creating significant headwinds. The disastrous tax-cutting mini-budget announced in September by new prime minister Liz Truss and her chancellor Kwasi Kwarteng led to turmoil on the bond and currency markets and saw Truss being replaced by Rishi Sunak the following month. The Bank of England continued the rate-raising programme it had begun in December 2021 over the course of 2022, with the base rate hitting a post-financial crisis high of 3.5%. Bank governor Andrew Bailey said he expected the British economy to be in recession until 2024.
Markets across Europe were hit hard by the fallout from Russia’s invasion of Ukraine and the sanctions that ensued. The dependence of Germany’s manufacturers in particular on Russian natural gas created significant problems for the country’s heavy industry, and European leaders spent much of the year looking for alternative sources of fuel. Eurozone companies were also seriously affected by the slowdown in China, in terms of both consumer markets and supply chains. The European Union’s apparent success in weaning itself off Russian oil and gas, and the mildness of the winter so far, have helped to avert a more serious energy crisis. However, the European Central Bank raised interest rates on four occasions in the second half of the year and has warned of further increases in 2023 as it battles to bring inflation under control.
Few major indices had as volatile a year as the Hang Seng in Hong Kong. Buffeted by China’s zero-Covid policy, a regulatory crackdown on technology firms and the government’s announcement at the Communist Party congress in October that ministers would no longer prioritise growth, the index had slumped by more than a third by early November. In the weeks that followed, the reversal of Covid-19 restrictions, announcements of support for China’s beleaguered property sector and a more benevolent approach to the tech sector helped share prices bounce back.
In Tokyo, the Nikkei 225 was held back by weakness in the US market, while Japanese electronics manufacturers also suffered from problems with global microchip production. The year ended on a downbeat note after the Bank of Japan surprised markets by making a change in December to the way it controls interest rates. Many analysts saw this as a precursor to raising rates in 2023 after official figures showed inflation had hit a 41-year high in November.
Hong Kong Hang Seng
Note: all market data contained within the article is sourced from Bloomberg unless stated otherwise, data as at 5 January 2023.