Despite December proving challenging for investors, the final quarter overall has proved positive for investors and comes as a welcome relief in a year that many would rather forget.
Taking 2022 in the round, in bond markets, the move in the bond yield on the US 10-year Treasury (from 1.5% to 3.9%) is the largest annual rise since Bloomberg started keeping records in the 1960s. It was also the largest decline in global equity markets, as measured by the MSCI All World index, since 2008. According to the Financial Times, global stocks and bonds erased over $30 trillion in value. There were some highlights – gold, oil, and UK large-capitalised stocks (predominantly energy and raw materials). Avoiding crypto stocks was a positive, with Bitcoin recording a decline of over 64%.
We are keen to avoid comparisons with the BBC weather forecast, which despite seemingly huge investment in technology, seems to spend most of the time telling us about the weather we have experienced, rather than focusing on what lies in store. So, with an eye to brevity, last year was one where we were all impacted by central banks finally taking substantive action to tackle inflation, the war in Ukraine, energy shocks, concerns over food supply and the cost of living, the currency, Chinese Covid-19 policies, a resurgence in Covid-19, climate change and threats to global supply chains.
We expect the first quarter of 2023 may well prove volatile as we grapple with more talk on the exact form various global recessions will take. Central banks will also be watching closely for further evidence that we are starting to see inflation rollover, heralding, we believe, a slowing of interest rate rises and the likelihood that the current interest rate cycle will peak in early summer – rates are then likely to remain unchanged for at least the remainder of the year. Inflation is likely to average 8%, ending closer to 3%-4% by year end, higher than the official long-term target of 2%. However, if interest rates remain near 4.5% to 5%, we will once again enjoy a real return from cash in the bank.
Speaking as someone who recently checked their household electricity consumption for December, I expect 2023 is going to prove somewhat of a grind, with the prospect of increases in taxation and declines in real wages leaving us all poorer come year end. As a commuter, albeit able to work from home, I also dream of seeing more than just the picket line operating at the railway station. The current Energy Bill Relief Scheme (EBRS) will expire in March; once again, the voluntary sector appears to be in the dark as to the nature of any replacement. At least, in the short term, we are seeing the prices of both oil and gas decline, which hopefully in turn will provide much welcomed relief.
This will hopefully offer a glimmer of hope to a sector which, certainly domestically, has seen another year of increased demand for its services, whilst at the same time having to grapple with the very factors impacting the beneficiary base, namely the legacy of the impact of Covid-19 and increasing costs in all areas. Retention of staff, especially when they face tempting offers from the private sector, is also likely to remain a challenge throughout 2023. We expect charities reliant on public sector funding to find it remains a challenging environment, both this year and next, with many cuts in government spending delayed until after the next election, anticipated for May next year.
Those still able to call upon reserves remain in a fortunate position, as do those who have managed to establish a reasonable diversification across their income streams – the latest figures from Age UK, covering the period to March 2022, are a case in point. We appreciate that, compared to Age UK, most charities in the sector are vastly smaller, but it does not lessen the need to examine what other income sources are available, even from other grant making charities within the sector.
Notwithstanding these domestic pressures and the ever-present geopolitical tensions, we remain optimistic that investors should start to benefit from opportunities in early summer 2023 and that this will prove a satisfactory year overall, with regular adjustments to regional and sectoral exposures, as markets start to account for better times ahead.
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