Sasfin Global Equity Model - Quarterly Review - Q4 2022

Global equity markets ended 2022 on a positive note as the MSCI All Country World Index returned 9.8% during the fourth quarter. Gains in global stocks can largely be ascribed to participants in the equity markets anticipating a more subdued hawkish approach by central banks as we head into 2023. Global equities were also boosted following the news that Chinese authorities would relax certain lockdown conditions following a string of protests across the country. Despite the renewed ebullience within stock markets, bond yields edged higher during the quarter as the US and European 10-year benchmark yields closed the year at 3.88% (+8 bps) and 2.53% (+40 bps) respectively.

As exceedingly high levels of inflation continue to be the scourge of central bankers, particularly those in the developed markets, the pattern of rate hiking persisted during the final quarter. The US Federal Reserve (“Fed”) increased its lending rate twice during the quarter, firstly by an increment of 75 basis points and later by a smaller increment of 50 basis points. The 25-basis point reduction in its most recent rate hike combined with what appears to be a plateauing of inflation elevated hope among some that the Fed might reduce its hawkish stance, possibly even pivot towards the doves, resulting in a renewal in confidence for stocks. For others, this may have just been a bear market rally, only time will tell.

While the Fed will remain concerned over tackling inflation with higher interest rates, markets appear to have moved onto what the implications may be under an increasingly restrictive interest rate environment. The “R-word” is likely to be the hot topic in 2023 as recession fears loom. Corporate earnings and household balance sheets will be closely monitored for signs of deterioration, particularly in an environment of higher interest rates.

What is noteworthy about global stock returns during the final quarter of 2022 is the gulf in performance between growth and value stocks. The MSCI All Country World Value Index increased 14.2% compared to the 5.3% increase in the MSCI All Country World Growth Index.

Gains across the value cohort were broad-based during the quarter. Stocks within the materials sector benefitted from higher industrial metal prices which rose during the quarter against a backdrop of a weakening US dollar and China relaxing the country’s lockdown restrictions. Strong earnings momentum continued to support investor sentiment towards the energy sector. Energy counters climbed higher during the quarter despite the prices of Brent crude and WTI ending the period relatively unchanged, as the pair closed December at $86 and $80 a barrel respectively. The increasing likelihood of a global recession has dampened the outlook for oil demand placing downward pressure on oil prices but the relaxation of lockdown restrictions in China and a weaker US dollar have provided pillars of price support.

Much of the relative underperformance during the quarter from growth stocks can be attributed to “big tech” names. Sentiment towards these more richly valued counters continued to fade during the final three months of the year owing to a variety of concerns. Challenges facing the US tech giants include production issues stemming from China as a result of intense lockdown conditions, regulatory concerns that include antitrust investigations as well as penalties and fines. Perhaps the biggest worry for investors and traders alike has been the recent slowdown in sales growth which may persist during a recessionary period.

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