Our collective reading habits suggested a lot of focus on Russia’s invasion of Ukraine but we think inflation and central banks were the key drivers of markets.
Apart from commodities and cash, most assets generated losses during 2022. Emerging market countries are often among the best and worst performers.
A review of the outcomes for our 10 surprises for 2022 (The Aristotle List) shows an unusual degree of success (including Argentina winning the World Cup).
Russia’s invasion of Ukraine dominated our thoughts in 2022 but inflation and central banks seemed more important to markets. We expect central banks to dominate again in 2023.
A year ago, we were expecting less economic growth and a convergence (and lowering) of asset returns during 2022. We got the inflation and rising bond yields that we expected (and more) but were surprised by the extent of the market downside. The best performing assets so far in 2022 have been commodities and cash.
As a reminder of events, here are Bloomberg’s most-read articles during 2022 (paraphrased):
1. Taiwan to join US-led sanctions on Russia (Feb 25)
2. Russia invasion of Ukraine ignites European security crisis (Feb 24)
3. Russia steps up aerial campaign… (Mar 1)
4. Stocks surge in wild ride after CPI selloff (Oct 13)
5. Stocks storm back from 4% rout… (Jan 24)
6. Ukraine update: Russia’s gas threat… (Mar 8)
7. Citi trader made error behind flash crash (May 3)
8. Russia vetoes UN resolution… (Feb 25)
9. Stocks sink to 13-month low… (May 9)
10. Blinken: meeting with Lavrov cancelled (Feb 23)
As always, bad news sells. Many of the most read stories were about Russia’s invasion of Ukraine but Covid seems to have slipped into the background. Though there is a slight mention of inflation, it is amazing that central banks are absent from that top 10. However, #11 on the list is “Stocks crater as Fed-Policy jitters rock trading” from May 5, with more frequent mentions beyond item #20.
Inflation and central bank tightening
It is our opinion that the poor performance of most assets had more to do with inflation and central bank tightening than with Russia’s invasion of Ukraine. One way in which the invasion of Ukraine made its mark is the presence of European markets among the worst equity and fixed income performers. Europe is not only dependent upon Russia for a large part of its energy, but is also likely to suffer from the effect that sanctions are having on exports to Russia. In general, we find that the closer one gets to Russia (geographically) the larger are likely to be those negative effects and Hungary may also have suffered from its geopolitical ties with Russia (and ambiguous relationship with the EU).
With some success on Turkish bonds (whether in local currency or USD) and Brazilian stocks (ditto), now is the moment of truth for my full list of 10 surprises for 2022 (published on 9 January 2022), with a self-evaluation in brackets:
- S&P 500 finishes year lower than it started (yes)
- US 10-year treasury yield goes above 2.5% (yes)
- Travel & leisure outperforms on great reopening (yes)
- The US Senate remains Democrat (yes)
- Australia changes government and emissions policies (yes)
- Bitcoin falls below $30,000 during 2022 (yes)
- Turkey government debt outperforms (yes)
- Brazilian stocks outperform major indices (yes)
- EU Carbon goes above €100 per tonne (no)
- Argentina wins FIFA World Cup (yes)
Remember, this list does not represent our central scenario but is rather an attempt to identify non-consensus ideas that we believe had a reasonable chance of occurring (thereby surprising most investors).
It has been an unusually successful year for the Aristotle List (in 2021 the success rate was only 5/10). The one obvious miss was that EU carbon didn’t go above €100, though it did reach €98.
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