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Capital Markets Update: End of Year Review 2022

NOVA Wealth2 January 2023

Market updates from 2022

In a Nutshell

While we started 2022 still very much in the midst of the pandemic, as the year progressed new challenges emerged. Against a backdrop of international conflict, energy price spikes and domestic political changes, we saw the development of a few key themes, including supply chain disruptions; the inter-reliance of global economies; and dramatic price rises. However, while 2022 certainly saw volatility, it also highlighted more than ever the importance of careful and considered long-term financial planning.

COVID restrictions lifted, but UK political turmoil continued

It’s been a tumultuous year for the UK, with numerous changes in policy and government. We began the year in the midst of a lockdown following a spike in cases - but by mid-March most had been lifted and normal economic activity gradually resumed. The market response to this was initially positive, with the FTSE all-share index recovering 2.64% over the month. However, over the year as a whole the UK market has continued to fluctuate.

This is in part due to a series of political upheavals and changes at the highest level of government. Instability in Conservative Party leadership has unfortunately meant little consistency in strategy for tackling rising inflation and energy prices. However, since Rishi Sunak took up the position there has been a more positive response to government policy. This was particularly apparent following the November budget update in which Jeremy Hunt outlined plans to freeze tax brackets and raise tax revenue through additional windfall taxes on energy company profits.

Russia invades the Ukraine, gas prices soar

One of the most significant developments of the year was the Russian invasion of the Ukraine - both in terms of its humanitarian violations and its wider global economic impact. Beginning in February, the invasion has led the World Bank to estimate a 45% shrinkage to the Ukrainian economy. This prediction has mostly held true, with economic growth for the year sitting at around -35% by December.

As to be expected, investors have largely responded by shifting away from more speculative growth stocks (favoured in recent years) towards traditionally safer asset classes. Economic volatility has persisted across the year as the EU and Russia placed tit-for-tat economic sanctions on one another. The resulting restrictions to oil supply drove up prices dramatically - by mid-March Brent oil prices had risen to their highest level since 2008, sitting at $140 per barrel. While they’ve since dropped back down (with some fluctuation) to around $80 per barrel, as the conflict continues, we can expect to see continuing volatility here.

Rising energy costs and historic levels of inflation

Across the year, the tightening of oil supply and general economic turmoil has put upward pressure on global energy prices, in turn generating high levels of inflation. In the UK, there was some uncertainty regarding how the government planned to tackle the crisis. For much of the year Boris Johnson delivered little in the way of a coherent plan, but an official energy bill cap was finally announced under Liz Truss. However, the now-infamous “mini budget” gave no indication of how this plan (with an estimated cost of £90bn) would be paid for - which was especially concerning given the Truss administration commitment to income tax cuts and staunch opposition to any windfall tax.

For much of 2022, the EU also struggled somewhat to reach an agreement on how to tackle rising energy costs. Some governments have tried to mitigate upward pressure on oil prices by diversifying supply - but as we moved into the winter months the need for a short-term solution has been increasingly apparent. President of the European Commission, Ursula von der Leyen, has been pushing for the introduction of a temporary energy price cap. Some countries - Germany, Denmark and the Netherlands among them - have criticised the proposal. They argue that countries could struggle to secure supply in the international market with such a cap in place, thereby exacerbating the issue. However, after months of debate the EU have finally reached an agreement on a €180 per-MWh cap.

Looking ahead

2022 was largely characterised by volatility, with markets fluctuating rapidly in response to frequent political change and economic uncertainty. However, it’s at the end of years like this that it is best to reflect on the “big picture”. Growth was still positive across the year over a range of markets. The FTSE100 index was up 2.26% over 2022; while the Nasdaq Composite was up 4.5%; the DAX Index was up 6.25%; and the CAC40 up 5%. Even China - which has experienced a historic economic slowdown this year - was positive, in both the SSE Composite and Hang Seng indexes. As in previous years, the data indicates that in the aggregate it’s better to have stayed in the market.

Volatility is always something we will need to contend with when investing. There can be a strong temptation to liquidate positions during downturns, to try to “time the market”, but it’s precisely during these periods that it’s important to keep a cool head and look to the long term. Investors should try to stick to a robust long-term financial plan and remain diversified in their investments. To kick-start this process, you can book an initial chat with the team by clicking here.

Important information:

The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation.

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