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The year ended on a sour note with most asset classes losing ground in December following a brief relief rally in October and November.  This capped a particularly challenging 2022 with few places to hide.  Markets were plagued by several factors including multi-decade high inflation leading to Central Bank interest rate hikes, a war in Ukraine as well as ongoing Covid lockdowns in China.  What has made this year particularly difficult, has been the sharp fall across both stocks and bonds. As a result, even the most conservative portfolios experienced losses in 2022.

Global equities were broadly weaker in December with notable weakness in US stocks.   This was due to more hawkish comments by central banks (indicating interest rates were likely to continue to increase) as well as signs of a further weakening global economy.   In the US, growth and technology stocks were particularly hard hit given poor earnings releases from some large bellwether names as well as concerns about delays in production lines out of China.  There were also modest declines in the UK, Europe, and Emerging Market indices.   That said, Chinese stocks proved to be an outlier rallying sharply over the month.  This was following the governments swift exit from its highly restrictive Covid policies coupled with announcements that they would be offering further support to the property market.  These recent developments could mark an inflection point in the Chinese economy which could lead to a sharp recovery in economic activity both locally and abroad.

Bond markets also experienced weakness in December giving back some gains generated early in the quarter. Optimism of a Central Bank pivot faded in December as the Fed announced that rates could go higher than originally projected and surprise policy decisions made by the ECB and Bank of Japan indicating interest rates hikes could maintain their higher trajectory over the medium term.  This led to broad based declines across both investment grade and high yield bonds.

The recent trend of US dollar weakening helped lift precious metal prices over the month while industrial metals also benefitted from the tailwind of the Chinese reopening narrative.  Conversely, energy prices fell over the month.  Natural Gas prices fell to levels not seen since the start of the war in Ukraine owing to a mild winter while oil prices fell on concerns over the possibility of a recession in Western markets.

While 2022 has clearly been difficult, it is important to remember that markets tend to discount the future and most asset classes are trading at more attractive valuation levels.  That said, there are still outstanding risk factors, including uncertainty over future inflation and interest rates, the extent of any earnings downgrades in a recessionary environment and ongoing geopolitical concerns. Based on these factors, we maintain a cautious stance but are actively looking for investment opportunities as they arise.