December 2022 Market Insights
Most developed markets retreated after the rally in recent months as investors’ concerns about a global recession outweighed the news of China re-opening and moving away from its Covid Zero policy.
Written by Kevin Hua Co-founder & Chief Investment Officer
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What happened to the markets in December?
Most developed markets retreated after the rally in recent months as investors’ concerns about a global recession outweighed the news of China re-opening and moving away from its Covid Zero policy.
Hong Kong markets rose again after months of underperformance with the HSI and HSCEI Indices, up +6.37% and +5.18% respectively (local prices). Interestingly, China’s Shanghai Composite Index was down only -1.97% (local price) in comparison.
All other major developed market indices were in the negative with the U.S. NASDAQ Index, down -8.73% and Japan’s Nikkei 225 Index, down -6.70% (local prices) being the worst performers.
Fears of recession weigh on U.S. markets
The U.S. Federal Reserve will likely slow the pace of its interest-rate increases but emphasised that rates will need to keep rising and remain restrictive for some time to control inflation, which came in at 7.1% for November, which was lower than expectations.
In December, it raised interest rates by another 0.50% with projected rates ending next year at 5.1%, before being cut to 4.1% in 2024. It said that the size of the next rate increase in February 2023 would depend on incoming data with an expectation that once they reach that peak, they’ll stay on hold through all of 2023.
However, investors remained concerned for the economic outlook for 2023 as CEOs from Goldman Sachs and JPMorgan warn of recession and earnings weakness.
Europe also faces recessionary concerns
Europe is facing similar recessionary concerns with the Purchasing Managers Index falling to its lowest level in two years in France. Similarly, U.K. companies are bracing for an economic contraction, with both the manufacturing and service sectors experiencing a slowdown in 4Q 2022.
China re-opening brings some hope but even more questions
During December, China’s National Health Commission set out 10 new measures to assist the move away from its Covid Zero policy. Historic protests put pressure on President Xi Jinping to quickly change policy direction, particularly as the country continued to produce weak trade and economic data. Retail sales and factory output have slowed, and unemployment has increased.
With the economy re-opening, coronavirus infections are spreading rapidly. China’s elderly vaccination rate is still well below other countries and the healthcare system is under-resourced and under pressure. It is also increasing isolation in the short-term and causing a fall in travel and economic activity as evidenced by subway passenger numbers falling in cities including Shanghai and Guangzhou as infections surged.
Investors are also concerned that China’s decision to relax its pandemic restrictions would spur inflation even further globally.
Meanwhile, the Bank of Japan amended its yield curve control stance by doubling its cap on 10-year yields to 0.5%. However, it was more aimed at keeping stimulus than changing policy trajectory. Its dovish stance was reinforced as it announced a bond buying operation after global yields surged. Japan’s factory output shrank for a third straight month in November, supporting the central bank’s view that the economy continues to need monetary support.
No end of year rally for Australian Equities
While unemployment remained steady, job vacancies remain high. When compared with the pre-pandemic levels, both private and public sector vacancies were close to double what they were in February 2020 (up by 96 per cent and 89 per cent respectively).
The Australian property market has notched its deepest downturn on record after national home values slumped 8.4 per cent since their peak according to CoreLogic. Successive interest rate rises, surging inflation, low consumer sentiment and deteriorating affordability drove a shift in Australia’s 2022 housing market performance. Home prices in Sydney saw the biggest falls (-13%), followed by Brissie (-10%) and Melbourne (-8.6%).
ING bank are predicting the Australian economy to slow in 2023, stating GDP growth is likely to be under 2% for the year. As with all economic forecasts, time will tell.