Quarterly Investment Review – Q3 2022
Some sombre clouds have darkened the global economic outlook. The energy crisis is making headline news daily, and creating considerable political trouble. China’s economy continues to suffer due to their zero Covid policy and the weakening of its real estate market. Inflation is running at levels in the West not seen for decades. Then at the end of the quarter a radical and poorly communicated budget statement in the UK led to an alarming collapse in sterling and UK gilts. So, it is not surprising that the markets have been under pressure. Equities had seen the worst first half to the year since 1962. By the end of the third quarter the World Index was down 26%, and the Nasdaq was down 32%. Technology having been far and away the best performing sector in the last decade, meant that a lot of money was crowded there, so it has suffered even more than the general index. The bond market has performed even worse, with some analysis showing 2022 being the worse year for bonds since 1788 and 1865. It is an environment that begs a lot of questions that are not easy to answer. How will the war in Ukraine progress? Can European solidarity with Ukraine survive a cold winter? How in control of its real estate sector is China, remembering that Chinese real estate is now the largest financial asset in the world? What happens if Central Banks run out of room to raise rates due to their national debt situation, but inflation remains high? Put another way how would Central Banks respond to an inflationary depression? That could be caused by continued high prices of food and energy, and disrupted supply chains.
Many of these uncertainties come down to inflation and the cost of living. Some price rises are due to the lingering after effects of Covid with shortages in critical components, such as semi-conductors, exacerbated by China’s lockdown. Russia’s invasion of Ukraine represents a completely different scale of disruption. Europe’s reliance on Russian gas, for example, represents a colossal strategic mistake. How can European economies thrive when they undergo a five to ten-fold increase in electricity prices?
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