Overall Market Summary:
Stock markets concluded a volatile year with gains in December. Asian shares were buoyed by China easing its Covid policy, while European equities also saw strong advances. Government bond yields rose towards the end of Q4, reflecting market disappointment as major central banks reaffirmed plans to tighten monetary policy despite signs of peaking inflation. Commodities saw gains, led by industrial metals.
United States:
US equities achieved robust gains in Q4, particularly in November. Investors balanced the Federal Reserve's cautious stance with indications of slowing policy tightening and cooling inflation. Strong corporate earnings in some sectors also contributed to gains.
Annualized Q3 GDP was confirmed at 3.2%, surpassing the second estimate of 2.9%. Unemployment remained at 3.7%, with 263,000 jobs added in November—the lowest since April 2021. November's consumer price index (CPI) showed a month-on-month inflation increase of 0.1%, down from October, with year-on-year inflation at 7.1%. The Fed's final rate hike of the year was 50 basis points (bps), a decrease from the previous four consecutive 75 bps hikes, with expectations of continued rate increases in 2023.
Energy stocks performed particularly well, with Exxon and Chevron posting record profits. However, consumer discretionary stocks, notably Tesla, underperformed.
Europe:
Eurozone shares saw a strong Q4, outperforming other regions. Gains were driven by sectors like energy, financials, industrials, and consumer discretionary, while consumer staples lagged. Hopes that inflation might be peaking supported equity gains, with annual inflation falling to 10.1% in November from 10.6% in October. The ECB raised interest rates by 50 bps in December, slower than previous 75 bps hikes, but warned of continued rate increases and stopped replacing maturing bonds.
The eurozone economy grew by 0.3% quarter-on-quarter in Q3, down from 0.8% in Q2. Forward-looking indicators pointed towards contraction, though the rate of decline moderated. The composite purchasing managers’ index for December rose to 48.8 from 47.8 in November, indicating contraction but at a slower pace. Falling gas prices, due to unusually mild weather, helped alleviate some cost pressures.
United Kingdom:
UK equities rose in Q4, aided by stabilization after the September crisis. The reversal of policies from the 'mini-budget' and the new chancellor's fiscal prudence helped calm markets. Rishi Sunak's appointment as Prime Minister, along with his prior experience as chancellor, helped stabilize gilt yields and interest rate expectations, supporting domestically focused UK equities. The Bank of England's decision to slow interest rate hikes also contributed to the recovery.
Economically sensitive areas of UK equities outperformed amid hopes of a potential interest rate cut by the US Federal Reserve in late 2023.
Japan:
Japanese stocks rose in October and November but declined in December, ending Q4 with a positive total return of 3.3% in yen terms. The yen strengthened against the US dollar from November, returning to levels seen in July and August. Strong corporate earnings and record share buybacks highlighted management confidence.
The Bank of Japan's decision to widen the band for 10-year bond yields, seen as a step towards policy normalization, surprised investors and drove yen strengthening in December. The government introduced a substantial fiscal package to support domestic recovery in 2023, and lifted international travel restrictions, including resuming the visa-waiver program.
Asia (excluding Japan):
Asia ex Japan equities saw robust gains in Q4, with strong performance in China, Hong Kong, and Taiwan. The easing of Covid restrictions in China and improved US-China relations contributed to the growth. However, Taiwan's gains did not continue in December due to geopolitical tensions, higher US interest rates, and lower demand for electronic goods.
South Korea, Thailand, the Philippines, and Singapore ended the quarter positively. The US Federal Reserve's indication of smaller future rate hikes also boosted many Asian markets.
Emerging Markets:
Emerging market equities posted strong Q4 returns, aided by a weaker US dollar. Optimism about a shallow recession and a recovery in markets fueled gains, particularly in November. However, the Fed's commitment to fighting inflation tempered this optimism in December. China outperformed due to the relaxation of Covid regulations and support for the housing sector.
Middle Eastern markets underperformed due to weaker energy prices. Indonesia and India also saw negative returns, while Brazil faced policy uncertainty post-election. Poland, Hungary, Greece, and Egypt rebounded, with Turkey leading due to continued monetary easing.
Global Bonds:
Q4 ended with mixed results in bond markets. Government bond yields rose, reflecting disappointment at central banks' hawkish tone. The Fed raised rates to 4.5%, the Bank of England to 3.5%, and the Bank of Japan modified its yield curve control policy.
Credit spreads tightened, leading to positive returns for US and European investment-grade and high-yield bonds, which outperformed government bonds. The eurozone faced severe inflation but showed signs of slowing towards Q4's end, though the ECB continued tightening policies.
US 10-year and 2-year yields rose slightly, while Germany's and the UK's yields showed varied movements. The US dollar's rally slowed, with the dollar index losing nearly 8% in Q4 but ending 2022 higher. Among G10 currencies, the New Zealand dollar, Norwegian Krone, and Japanese Yen made strong gains.