2022 Year in Review

War, politics, high inflation and interest rate rises….

Year 2022 will be remembered on multiple fronts including Russia-Ukraine war, rising interest rates, high inflation, high energy prices and supply-chain disruptions amongst other things. The financial markets tumbled amid macroeconomic shocks and posted the worst performance since 2007-08 global financial crisis after having a darling decade-long boom. Some of the key highlights of 2022 are as follows:

• Russia-Ukraine war

Russia-Ukraine conflict started in February 2022 that was a major event of the last year. The US, UK, Europe, and many other countries responded with fresh sanctions on Russia. Along with pandemic era supply-chain disruptions, this conflict put a significant pressure on energy and food items that added to inflationary pressures, leading to ‘cost of living’ crises faced by most economies, both developed and developing.

• Post covid-19 supply chain disruptions and China’s zero covid policy

Although most of the world came out of pandemic influenced lockdowns, but China continued to implement its zero covid policy, particularly more pronounced in the last half of the year. The aftershocks of supply chain disruption during the peak of Covid, along with China’s current policy continues to pose a challenge to the supply chain. As China is the second largest economy and a major player in the world’s economic system, this has and continues to result in shortage of many products, only to add to the inflationary pressures.

• Multi-decade high inflation

Inflation was the key theme of 2022 that translated into ‘cost of living’ crises. A multi-year’ easy monetary policy (quantitative easing), especially during covid-19 pandemic to boost economic growth, along with above mentioned factors resulted in 40-years high inflation in the US, UK, Europe, and many other countries. Inflation eroded households’ savings and made it difficult for many to withstand rising living costs. Governments and central banks intervened aggressively to get inflation under control, however, the year 2022 ended before the fight with inflation does. At the end of 2022, inflation in the US was 7.10%, in the UK 10.70%, and in Europe 10.10%. A snapshot view of annual inflation rates across the world is shown below.

• Central Banks’ hawkish approach

The Central banks use interest rates to control money supply in the economic system to keep inflation under control. They increase interest rates when inflation is elevated, as they did in 2022. The US, UK, Europe, and many other developed countries kept interest rates near zero (negative rates in Japan and Europe) most of the time in the last decade to boost economic growth. However, they started increasing interest rates in the first quarter of 2022 when inflation was getting out of control. After several episodes of rate increases, the current interest rate is 4.5% in the US, 3.5% in UK, and 2.5% in Europe. Central banks ended 2022 with the promise that the rates will keep rising and will stay high until they get the inflation down to their long-term target of 2%. The change in interest rates over the year in the US, UK, Japan, Canada and Euro area are shown below (as of 15 December 2022).

• US Dollar strength

The US dollar strengthened against nearly every other major currency to levels not seen in decades, as the Federal Reserve aggressively hiked interest rates to combat inflation. On the whole, the nominal broad dollar index — which is used to measure the value of the dollar against a basket of currencies widely used in international trade — appreciated over 12% in 2022. The strength in US dollar along with rising energy prices posed a challenging situation for a number of developing economies.

• UK politics and pound volatility

The UK went through three prime ministers between September and December as political instability, Conservative party infighting, and economic crisis shook Westminster. Boris Johnson resigned as Prime Minister and leader of the Conservative party, with Liz Truss being elected as his successor in September, before resigning in October and being succeeded by Rishi Sunak. Former Chancellor Kwasi Kwarteng will be remembered for many years to come as his fiscal statement to the House of Commons on 23 September weakened the pound below $1.07, lowest since 1985 after he announced several tax cuts. The pound remained volatility during 2022 and depreciated by 10.6% against the US dollar as shown below.

• Global assets drop in value

Year 2022 has been a nightmare for traditional asset classes like stocks and bonds. As demonstrated in the chart below, the equity markets were the worst performing asset among all the investment vehicles. The US equity market barometer, the S&P 500 index, declined 19.44% while UK broad based equity index FTSE 100 ended the year marginally positive. However, Dow Jones Islamic Market Index plummeted 25% in 2022. Gold ended the year with almost nil return, meanwhile, commodities and energy were the best performing assets with a gain of 11% and 7%, respectively.

Year 2022 has been an eventful year with a lot of negative economic news, particularly the rapid interest rate hikes that are yet to show its full impact on growth, employment, housing market, corporate earnings and other key indicators. Year 2023 is expected to be a challenging year as economies shift towards a higher rate environment after a period of relaxed monetary policy and fiscal stimulus, especially during covid-19.

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Past performance is not a reliable indicator of current or future returns. This overview contains general information only and does not consider individual objectives, taxation position or financial needs. Nor does this constitute a recommendation of the suitability of any investment strategy for a particular investor. It is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy to any person in any jurisdiction in which such an offer or solicitation is not authorised or to any person to whom it would be unlawful to market such an offer or solicitation.