The year in review: Steering through turbulent markets
12 Apr 2023
3 MINReflecting on the past financial year, it has clearly been a challenging one for investors. Despite most asset classes remaining below their 2021 highs, they have managed to bounce back from their lows during the year. Unfortunately, the performance of most markets has been disappointing, and significant uncertainty remains. However, there are some positive indicators that could support better performance moving forward.
A stormy start
The financial year kicked off in April 2022 during turbulent times around the world. Russia had invaded Ukraine, the era of ultra-low interest rates was coming to an end, and supply chain issues were still causing disruptions. Concerns over energy prices and energy supply – especially in Europe – and the rate of inflation around the world were regularly making headlines. Central banks responded by increasing the pace of their interest rate hikes, which had a negative impact on the performance of both equities and fixed interest. Thankfully, as the year progressed some of these pressures started to ease. Inflation peaked in the United States in June 2022, and has since trended lower. A mild winter in Europe and energy saving measures led to higher gas storage levels, easing fears of energy shortages. The price of oil also started to trend lower in July and has continued to do so.
A break in the cycle
There is a belief in financial markets that when the Federal Reserve (the central bank in the US) starts raising interest rates, it will keep doing so until something breaks. In March 2023, something broke. Silicon Valley Bank and Signature Bank were caught in a bank run, and as a result both were closed by regulators. Fortunately, the actions that central banks and regulators have taken seem to have contained this event and have calmed the market’s nerves.
Looking ahead
Following this event, central banks are still expected to raise rates further, but at a slower pace. It also looks like most central banks are nearing the end of their rate-hiking cycle. This paring back of rate-hike expectations has seen bond yields fall and bond prices rise. Despite a tough year, fixed interest now offers higher yields – making it more likely to deliver stronger returns and greater potential upside in a weaker growth environment. Following their fall, equities also look more attractive from a valuation perspective.
Asset class performance
Markets delivered mixed performance over the financial year, with some asset classes delivering performance well below what investors have become accustomed to over recent years. Cash outperformed all other asset classes, delivering a positive return. All other asset classes provided a flat-to-negative overall return, with International Fixed Interest being the worst-performing asset class.
Investment approach
As we move forward, it’s important to remember that investing requires riding out the ups and downs. Although it’s concerning for investors when markets fall, it’s all part of the investment journey. Performance should be considered over the long term. Investing in higher quality assets has proved to be a sound strategy over time. It can be particularly effective during periods of market uncertainty.
Any views expressed in this article are the personal views the author and do not necessarily represent the views of BNZ, or its related entities. This article is solely for information purposes and is not intended to be financial advice. If you need help, please contact BNZ or your financial adviser.
Neither Bank of New Zealand nor any person involved in this article accepts any liability for any loss or damage whatsoever which may directly or indirectly result from any, information, representation or omission, whether negligent or otherwise, contained in this article.
