Peter Rutter, Royal London Asset Management
What challenges did global stocks face in 2022?
Rising interest rates, bond yields, inflation and threats of a looming global recession have been significant challenges for stocks globally in 2022. This formidable set of headwinds has seen global equity markets post significant losses in US dollar terms. With the ‘transitionary' inflation pressures of global supply chain disruption that first appeared in the aftermath of Covid being exacerbated and prolonged by the escalation of Russian aggression in Ukraine, an inevitable tightening of monetary policy globally in order to try and control this has resulted in interest rates rising sharply over the course of the year.
With this rise, the present value of future company cash flows, upon which stocks are valued, painted a very different picture for many of the previous market leaders. As a result, traditional higher growth areas, such as technology stocks, saw sharp sell-offs over the course of the year and, as inflation pressures took hold, those companies with less pricing power also began to come under pressure.
What worked well in Global Equities in 2022?
As expected with hindsight, those sectors that tend to do well in rising inflationary periods were the best places to be over the year. Both energy and commodities sectors were especially strong during the year as prices rose on the back of strong demand for weaker supply.
Currency movements had a notable impact over the year with the Federal Reserve's early and more aggressive approach to raising interest rates pushing the US dollar higher against the world's other main currencies. For sterling investors in global overseas assets, this dollar strength provided a boost to returns over the year.
When researching and building portfolios of global equities we tend to look at the world though a proprietary Corporate Life Cycle classification lens. This is based on the belief that corporate returns on productive capital and growth tend to progress along a Life Cycle and every company can be located economically in one of five Life Cycle categories.
Over the course of 2022 we observed that those companies at the front end of the Life Cycle, which we term Accelerators and Compounders, came under significant pressure against the market backdrop. It is here that you would expect to find early-stage technology companies together with some larger, more established, traditional growth business which have been the market leaders for so long. In contrast, the later Life Cycle stages of Mature and Turnaround companies, where we tend to find much more representation of the traditional Value sectors, were much stronger overall performers than in previous years.
Download the full article: Global Equities - Where next?
Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Changes in currency exchange rates may affect the value of these investments.
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This is a financial promotion and is not investment advice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.
Issued in January 2023 by Royal London Asset Management Limited, 55 Gracechurch Street, London, EC3V 0RL. Authorised and regulated by the Financial Conduct Authority, firm reference number 141665. A subsidiary of The Royal London Mutual Insurance Society Limited.
This post is funded by Royal London Asset Management
