Uncommon truths 2022: a year in review

Russia’s invasion of Ukraine dominated our thoughts in 2022 but inflation and central banks seemed more important to markets. We expect central banks to dominate again in 2023.
A year ago, we were expecting less economic growth and a convergence (and lowering) of asset returns during 2022 (see 2021 in review). We got the inflation and rising bond yields that we expected (and more) but were surprised by the extent of the market downside.
The best performing assets so far in 2022 have been commodities and cash (see Figure 3). All other assets in Figure 3 generated negative returns, except for Chinese bonds and UK equities (in local currency). The 6.9% USD total return on our Neutral portfolio in 2021 (10.2% in local currency) was followed by -16.1% in 2022 (-12.1%). The Neutral portfolio is a static mix of global cash, fixed income, equity, real estate and commodity assets (see Figure 6 for weightings).
As a reminder of events, here are Bloomberg’s most-read articles during 2022 (paraphrased):
- Taiwan to join US-led sanctions on Russia (Feb 25)
- Russia invasion of Ukraine ignites European security crisis (Feb 24)
- Russia steps up aerial campaign… (Mar 1)
- Stocks surge in wild ride after CPI selloff (Oct 13)
- Stocks storm back from 4% rout… (Jan 24)
- Ukraine update: Russia’s gas threat… (Mar 8)
- Citi trader made error behind flash crash (May 3)
- Russia vetoes UN resolution… (Feb 25)
- Stocks sink to 13-month low… (May 9)
- Blinken: meeting with Lavrov cancelled (Feb 23)
As always, bad news sells. Many of the most read stories were about Russia’s invasion of Ukraine but Covid seems to have slipped into the background. Though there is a slight mention of inflation, it is amazing that central banks are absent from that top-10. However, #11 on the list is “Stocks crater as Fed-Policy jitters rock trading” from May 5, with more frequent mentions beyond item #20.
It is my opinion that the poor performance of most assets had more to do with inflation and central bank tightening than with Russia’s invasion of Ukraine. When measured in US dollars, there has been little to choose between the year-to-date total return on equities and government bonds, with MSCI World suggesting -17.9% on equities and the ICE BofA Global Government Bond Index indicating -17.1% (see Figure 3). The big exceptions in Figure 3 are UK equities (where energy and metals & mining companies feature prominently) and Chinese bonds (perhaps benefiting from having one of the few easing central banks).
Figure 1 shows the results of our annual ranking within asset groups. As is often the case, emerging markets dominate both ends of the spectrum, though Swedish equities and UK gilts appear in the bottom three of their categories. Turkey has made a good comeback – in 2021 Turkey had the worst performing equity and bond markets, along with the weakest currency, but this year has the top performing equity and bond markets (despite more currency weakness). It is hardly surprising that Sri Lanka is among the worst performers. More surprising is that the Russian rouble features among the strongest currencies (and that it appreciated against the US dollar).

Past performance is no guarantee of future results. As of 16 December 2022. Equity data is based on Datastream indices; government bond indices are supplied by ICE BofA; currencies are based on WM/Refinitiv exchange rates. Source: Refinitiv Datastream and Invesco.
One way in which the invasion of Ukraine made its mark on the rankings in Figure 1 is the presence of European markets among the worst equity and fixed income performers. Europe is not only dependent upon Russia for a large part of its energy, but is also likely to suffer from the effect that sanctions are having on exports to Russia. In general, we find that the closer one gets to Russia (geographically) the larger are likely to be those negative effects and Hungary may also have suffered from its geopolitical ties with Russia (and ambiguous relationship with the EU).
It may be thought that the poor showing of UK government bonds is due to sterling weakness. However, the UK has the same ranking whether we measure in USD or in local currency and it appears that political turmoil and fiscal missteps may also have played a role (we didn’t predict the chaos in Westminster).
With some success on Turkish bonds (whether in local currency or USD) and Brazilian stocks (ditto), now is the moment of truth for my full list of 10 surprises for 2022 with my self-evaluation in blue:
- S&P 500 finishes year lower than it started (yes)
- US 10-year treasury yield goes above 2.5% (yes)
- Travel & leisure outperforms on great reopening (yes)
- The US Senate remains Democrat (yes)
- Australia changes government and emissions policies (yes)
- Bitcoin falls below $30,000 during 2022 (yes)
- Turkey government debt outperforms (yes)
- Brazilian stocks outperform major indices (yes)
- EU Carbon goes above €100 per tonne (no)
- Argentina wins FIFA World Cup (TBD)
Remember, this list does not represent our central scenario but is rather an attempt to identify non-consensus ideas that I believe have a reasonable chance of occurring (thereby surprising most investors). They must therefore be put in the context of the prevailing sentiment at the start of the year (when the S&P 500 was hitting records and the 10-year US treasury yield was 1.5%).
At the time of writing we do not know the winner of the FIFA World Cup but otherwise it has been an unusually successful year for the Aristotle List (in 2021 the success rate was only 5/10). The one obvious miss was that EU carbon didn’t go above €100, though it did reach €98 and perhaps I should have been braver about Bitcoin (I still believe will go below $10,000).
I will publish the selections for 2023 in early January. Unlike in the two previous years, I have had plenty of direct contact with investors over recent months and this has helped me judge the prevailing mood.
As usual, I believe the main driver of returns will be the economic cycle. I think that rising inflation and tightening central banks were the major driving forces in 2022 and expect the decline of inflation and the ending of central bank tightening to be key in 2023. Hence, I am more optimistic about market outcomes for next year, despite the risk of recession. Figure 2 suggests that rising bond yields were more important than falling profits to equity markets in 2022. I suspect that profits will fall in 2023 but that bond yields will fall, with the latter being the (positive) driving force.
On that note, all that remains is for Andras and I to wish you and your loved ones a happy holiday season.
Unless stated otherwise, all data as of 16 December 2022.

Notes: Past performance is no guarantee of future returns. Daily data from 31 December 2021 to 16 December 2022. Chart shows the cumulative change in price/earnings ratios and EPS (earnings per share) for the Datastream Total Market World index since 31 December 2021. Capital returns are the sum of earnings growth and the change in P/E ratios. The sovereign bond yield is represented by the yield-to-maturity of the ICE BofA Global Government Bond Index. All data shown in US dollar terms. Source: Refinitiv Datastream and Invesco