Biggest surprises in 2022 and top predictions for 2023

Undeniably, 2022 has been a tough year for the financial markets in Asia, with stubbornly high inflation, Russia’s invasion of Ukraine, tightening monetary policy and prolonged lockdowns in China all weighing on performance.

Practically all asset classes have suffered year-over-year losses this year, with few exceptions such as alternatives.

As we brace for a new year, read on to see what the top surprises for last year were and what the predictions for next year are by leading market observers in Asia.

Biggest surprises in 2022

The two biggest surprises were probably the non-transitory high inflation, and the greater-than-expected hawkishness of global central banks to combat inflation despite a growing risk of recession.

Bryan Cheung (BC): As markets painfully adjusted to the new regime of higher inflation and tighter liquidity that were absent in the past decade or so, many investors were caught off-guard with how rapid assets can be re-priced. This was not limited to the unprofitable, high-growth companies, but also the high quality, mega-cap technology companies that easily retreated by 30% or more from peak to trough. They were also surprised by the unusual positive correlation between bonds and stocks that led to one of the worst years for the classic 60/40 portfolio, when bonds couldn’t protect on the downside this time.

Moving to China, many investors did not expect the Chinese government to be as relentless on clamping down on the property sector given its systemic importance in China, and sticking to its zero-Covid policy when the rest of the world normalises. These, along with the continued US-China tensions, crumbled the market sentiment towards China. Interestingly, the government has also recently surprised the market with its accelerated policy shift since November. Its unexpected lift of zero-Covid policy and its additional 16 measures to rescue the property sector fuelled a strong rebound of Chinese equities and property developers’ bond prices in November.

William Chow (WC): Investors had to navigate an uncertain market environment, characterised by geopolitical risks, increased volatility, and looming recessions across several developed markets. They are increasingly facing a “new normal” in investments, as geopolitical and security risks frequently transcend economic issues.

Global financial conditions tightening notably this year have also led to capital outflows from many emerging and frontier market economies. The pace of policy normalisation and tightening policy has accelerated against a backdrop of rising inflation and currency pressures. Key gauges of systemic risk, such as higher dollar funding costs and counterparty credit spreads, have risen risking a disorderly tightening of financial conditions amplified by vulnerabilities built over the years.

Jasmine Duan (JD): Investors were quite optimistic about the global growth outlook entering 2022. Market participants were expecting global economies to deliver above-average growth. Elevated inflation was also viewed as temporary, and central banks expected to stay reasonably patient in pursuit of complete economic and labor market recoveries.

However, Russia’s invasion of Ukraine sowed the seeds of global economic uncertainty and have led to the surge of energy prices and more sticky global inflation.

Global central banks had to hike rates more aggressively to bring inflation under control. The shape of the global economy deteriorated very quickly due to the energy crisis, China’s continuous lockdowns and tightening of liquidity within the global financial system.

Top predictions in 2023

BC: Referencing views from the asset managers of our medalist funds, they generally viewed the US economy with greater optimism than the European one, where the probability of a recession appears higher.

Most managers expect corporate default rates to remain low, as companies globally have improved their balance sheets in recent years.

In anticipation of elevated market risk and credit-spread volatility, however, most managers have tended to increase duration as a ballast and pair it with a reduction in corporate credit exposure and/or equity exposure in the context of multi-asset funds.

Outside of the US and Europe, one of the Asian fixed income managers does not foresee a technical recession in the Asia-Pacific region but a slower GDP growth. Yet, they expect default rates in Asia to remain elevated over the next year, compared with historical averages, considering a continued consolidation of China property sector and the higher likelihood of a global recession.

China’s recovery story is expected to finally come through with the country’s pivot in zero-Covid policy, which will likely stimulate domestic consumption and serve as tailwind for Chinese equities in consideration of the already depressed valuations.

JD: We think a US recession is probably arriving around mid-year 2023, as it is strongly indicated by our most reliable leading indicators.

Since every US recession has been associated with an equity bear market, we expect that any rally in equity prices at the beginning of the year will, at some point, give way to another period of falling share prices reflecting declining expectations for earnings and eroding confidence in the future.

However, the stock market has always turned higher three to five months before the recession ends; we also know that overall, the economy and businesses have been successful at constantly adapting to changing conditions. So even if recessions are the painful periods, they are typically very short.

WC: Headwinds from slowing growth and higher rates will remain key market drivers.

Despite 2022 being a challenging year for equities, it is poised for recovery, supported by receding inflationary pressures, a softer dollar and China’s “reopening”.

Recessionary concerns will gradually take centre stage, as inflationary concerns subside.

Asian markets have also opened long-term opportunities across all major asset classes for investors to position for this cyclical recovery. Conditions are likely to stay fluid and fast-moving – a positive development in China’s Covid-19 narrative could lead to a quick change in investor sentiment. We remain cautiously optimistic in the first quarter of 2023, conscious of the potential of recession in the second and third quarters of the year, while ensuring we reflect themes of diversification, durability, and defensive positioning in our investments.