The new year brings a welcome chance for many of us to reset and reassess our finances. Indeed, many investors will be glad to see the back of 2022: it brought an unprecedented wave of challenges to governments and policymakers around the world, and everyone felt the pinch as the cost of living rose.
While many of us had a tougher year financially, scientific advancement continues at a pace. Last year saw significant breakthroughs in artificial intelligence, for example, which are likely to lay the foundations for exciting developments in the years to come.
Internet sensation ChatGPT – which allows users to have conversations with an AI system – accumulated one million users in only five days, breaking records set by Netflix and Facebook. Users were stunned by the breadth and depth of its intelligence, as it helped them code, answer general knowledge questions, and even write articles (readers need not be afraid: this article was written by a human).
DALL·E 2 – another AI system which creates images and art from natural language – also became more popular, accessible, and sophisticated last year. We decided to put it to the test, asking it to visualise the top investing themes of 2022. The results are in!
We said: Global banks increase interest rates in fight against inflation
DALL-E created:
2022: Around the world, inflation rose to highs not seen in decades, driven by supply chain issues and the conflict in Ukraine, which had a significant impact on energy prices in particular. In tackling the problem, central banks began raising interest rates to try and cool inflation, ending an era of ultra-low rates and loose monetary policy that begun after the 2008 financial crisis.
Higher interest rates meant that, for the first time in years, mortgage owners were faced with the prospect of hefty rises in their repayments. Equities and bonds sold off as investors reacted to this uncertainty and adjusted to the new environment.
2023 outlook: There are signs that inflation is beginning to plateau in some areas of the world’s major economies, but that doesn’t necessarily mean an end to the current cost-of-living crisis. The Nutmeg investment team expects inflation to moderate in 2023, relieving some pressure on policymakers. But cuts to interest rates remain a long way off.
We said: Pound crashing after government budget
DALL-E created:
2023 outlook: A new government, led by Prime Minister Rishi Sunak and Chancellor, Jeremy Hunt, has put the economy and bond markets on the road to recovery. The pound has stabilised and regained some strength against the dollar.
That said, the road ahead is unlikely to be plain sailing. The UK is forecast to enter a recession this year, and Hunt’s fiscal policy may mirror the austerity measures we saw in the 2010s (lower spending and higher taxes). We’ll find out more in March when he delivers his Spring Budget.
We said: The global movement of goods improves
DALL-E created:
2022: As most parts of the world continued to reopen after Covid lockdowns, supply-chain pressures improved. This helped the flow of goods around the globe and was a positive especially for some export-led economies.
That said, on a regional level, more localised challenges remained, which helped drive up inflation. Russia’s invasion of Ukraine put food and energy supply chains under pressure, while the semiconductor industry was hampered by China’s Covid lockdowns, stalling the flow of goods needed for manufacturing and technology.
2023 outlook: Supply chain blockages should continue to unwind, particularly now that China has relaxed its zero-Covid policy. This should help control or lower inflation, improve trade volumes, and may open fresh opportunities to invest in emerging markets.
We said: A strong US dollar
DALL-E created:
2022: The dollar rose to a 20-year high in 2022, benefitting from its status as a ‘safe haven’ asset in times of market volatility, and rising interest rates. However, a stronger dollar creates challenges for the wider global economy. It can make debt repayments harder in developing countries if they have borrowed in dollars and can also contribute to
rising inflation.
2023 outlook: The Nutmeg investment team thinks financial conditions will stabilise in 2023, which should see the dollar begin weakening. This would benefit the global economy, and emerging markets in particular.
We said: Geopolitics takes takes centre stage
DALL-E created:
2022: Last year saw a spike in geopolitical volatility. Russia’s invasion of Ukraine brought unwanted chaos to Europe; presidential elections in Brazil, France, and mid-term elections in the US, brought a mixture of continuity and change; and China spent much of the year ever more inward looking with its zero-Covid policy. The UK had three prime ministers and four chancellors, and widespread strike action sharpened tensions between Westminster and public sector workers.
2023 outlook: As the broad economic themes of 2022 are set to continue into this year, it’s likely that geopolitics will remain centre stage. That said, several major economies – US, France, Germany, Italy, and the UK – have no elections planned, and so may expect greater political stability.
The reopening of China should be positive for global politics, and the picture here may become even rosier if there can be some resolution to tensions surrounding the trading of semiconductors with the US. It may be a period of relative stability, but as history has taught us, there’s no guarantee.
We said: Russian oil ban causes energy crisis
DALL-E created:
2022: Russia’s invasion of Ukraine exaggerated an energy crisis that was building in Europe, forcing countries to reconsider how they power their nations. It revealed how dependent the region still is on imported fossil fuels: in recent years, Europe has struggled to produce its own renewable energy, leaving it more vulnerable to disruptions in the supply of fuel and how much it costs.
Governments were forced to step in, providing subsidies or asking their citizens to reduce their energy consumption. The crisis also impacted the economy, with some factories closing as they were unable to pay their electric and utility bills.
As you may expect, listed energy and commodity related companies were among last year’s top performers as global demand skyrocketed. Indonesian coal mining company Adaro Minerals was the world’s best performing stock in 2022, returning 1,600%.
2023 outlook: The Nutmeg investment team believes that European economies will continue to face significant challenges this year, as countries continue to pivot away from Russian gas. The energy transition is a slow and gradual process and, as we said in our 2023 outlook, although last year saw a resurgence in the demand for coal, the long-term trend toward renewable energy remains.
We said: Brazil market delivers positive returns
DALL-E created:
2022: Emerging markets faced several challenges last year, predominately due to China’s economic weakness, the stronger dollar, and higher inflation. However, Brazil, and its stock market, the Bovespa (or Ibovespa), was one of only three countries in the world to deliver positive returns. This was because it is a key exporter for commodities, which rose in price. Though a significant part of investors’ emerging markets universe, Brazil is home to just 84 companies, many of which are in the energy and materials sector.
2023 outlook: Looking at emerging markets as a whole, the Nutmeg investment team thinks that a weaker dollar, improved supply chains, and the end of interest rate rises could reveal opportunities, particularly now that China has reopened.
We said: China opens its doors to the world
DALL-E created:
2022: For most of 2022, China was closed off to the rest of the world, maintaining its zero-Covid policy. As the world’s second- largest economy, the impact of China’s underperformance was felt globally. Towards the end of 2022, China relaxed its Covid restrictions and opened up to more foreign investment: a sign that it may be about to return to growth – and the world stage – in 2023.
2023 outlook: The Nutmeg investment team is optimistic about the prospects for China in 2023. Although in the near-term, it is likely to go through a challenging transition, over the medium-term, a return to growth would be beneficial for the Chinese economy as well as the broader Asia-Pacific region. To find out more about our thoughts on China, watch our latest View from the Investment Desk with our chief investment officer, James McManus.
We said: Crypto currencies crashing
DALL-E created:
2022: Crypto encountered several challenges last year. As inflation rose and markets went into ‘risk off’ mode, investors sold off many currencies. This downward trend challenged the idea that cryptocurrencies may have been able to provide investors with a hedge against inflation. The collapse of cryptocurrency exchange FTX towards the end of the year increased investor scepticism and distrust, adding to the challenges for the credibility of this still relatively new asset class.
2023: The Nutmeg investment team is interested to see how the events of 2022 drive forward regulation in the cryptocurrency space. The team will continue to monitor this asset class to evaluate its long-term viability for investors – but they do not foresee these changes coming into place in 2023.
Risk warning
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future returns.
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