In the past three months, the motto «bad news is good news» has generally applied among investors. This, of course, refers to news from the economic front. The more clearly the economic engine stutters, the lower the inflationary pressure and, ergo, the greater the chances that the central banks will deviate from their steep path of interest rate hikes. In October and November, there was a great deal of this «good bad news», capital market interest rates fell and both the stock and bond markets began to recover. Not everyone benefited from the gloomy economic outlook. After major technology companies such as Facebook or Tesla have already suffered relatively badly from rising interest rates this year, downwardly revised growth forecasts are now also weighing on share price performance. The stock market darlings of the past years are suddenly the whipping boys. And vice versa: the laggards of the past are suddenly playing right at the front. For example, the energy sector was one of the outperformers not only in Q4 but in all of 2022.
In December, however, the hopeful rally was thwarted. Surprisingly solid economic data (bad good news) combined with the central banks' repeated reaffirmation of their determination to continue fighting inflation caused interest rates to rise and share prices to fall. Both the equity and bond markets thus ended the year on a negative note, which is representative of the year as a whole.
Market developments were also reflected in the relative performance of our risk-based equity strategies. During the strong upward phase until the end of November, we lost ground against the respective benchmarks in most universes. In December, however, we managed to either close this gap again or at least narrow it. In addition to risk-optimized stock selection, it also paid off that we are underweight in the volatile technology sector and in the US market in our global strategies for diversification reasons.
As already mentioned at the beginning, the ups and downs also took place on the fixed income front. Over Q4 as a whole, the yield curves of most currency areas shifted somewhat upwards - most strongly in the eurozone, where we are underweighted in our government bond funds. On the other hand, we saw falling interest rates in the SGD and GBP, which helped our performance thanks to our overweight.
2022 will go down in the history books as the most negative stock market year since the 2008 financial crisis. What is special here is not necessarily the price declines per se, but the fact that hardly any asset class was spared and the diversification between asset classes did not work as usual. This was particularly noticeable for investors whose personal risk profile dictates a defensive investment strategy with a high bond component. Interest rates are central to the valuation of all asset classes and are therefore arguably the most powerful lever in the financial markets. Just as virtually all asset classes have benefited from falling interest rates in recent years, the correction followed in 2022 as interest rates rose. This market phase shows how important efficient diversification within the individual asset classes is also in order to reduce losses in value. Despite the correction, it is also worth noting that rising interest rates are accompanied by higher interest income and thus also have a positive effect in the medium term.
The risk-optimized global equity funds (developed and emerging markets) and our bond solutions have achieved the desired effect in this environment, reducing both volatility and drawdown. Our fund was also able to achieve the desired risk reduction in the extremely volatile Chinese equity market. One downer remains the Swiss Equities fund, which underperformed its benchmark in 2022 due to the structural overweighting of mid caps - more information on this can be found as usual in our performance commentary.
