Review of 2022 and Outlook for 2023
It is fair to say that 2022 was a year of mixed outcomes, both for the UK and the World in general. On one hand, many families were able to celebrate the recent festive season with friends and extended family without the invasive fear of COVID and lockdowns. Furthermore, 2022 was the year when holidays abroad could again be enjoyed following numerous delays and cancellations over the past two years.
Unfortunately, just as hope for a more settled year seemed to be on the cards, the invasion of Ukraine by Russia in February struck a significantly more ominous tone for the rest of the year. Not only has the war brought with it a terrible human tragedy but also far-reaching global economic consequences. This was due mostly to a rapid increase in energy prices such as natural gas and oil, given that Russia is a major exporter of these commodities. The oil price and natural gas price increased from just over $50 and $3.80 respectively to a high of $119 and $9.30 respectively. In percentage terms, this meant the price of oil increased by 138% and natural gas by 144%.
In addition to this substantial rise in energy costs, the increase in demand from consumers, following two years of COVID lockdowns and ongoing constraints with supply chains, created the perfect storm for inflation. Whilst we have explained in previous updates why inflation is still preferable to deflation, the much higher than expected levels of inflation has caused understandable angst.
However, whilst 2022 again illustrated that predicting the future economic outlook is somewhat futile, there are still some real cases for optimism as we move in to 2023.
Oil and gas prices have fallen back to $86 and $4.14 respectively, representing a decrease of 38% and 55% respectively from their peaks in the middle of the year. As a result, early indications point to an easing in inflation which will hopefully slow the pace of interest rate increases which are of particular concern for homeowners with mortgages.
Following a failed attempt to contain COVID through a Zero COVID policy, the Chinese Authorities have taken the decision to completely reopen their economy. Although this has led to a huge spike in cases with an estimated 32 million new infections each day, the move away from a Zero COVID policy should lead to a boost in global economic growth over the medium term.
Finally, although the significant increase in interest rates is likely to push the global economy into recession, unlike with previous recessions, unemployment levels remain low, which should help reduce the length and depth of the recession.
As mentioned in our previous updates, when markets are volatile, ensuring your portfolio is highly diversified provides an effective level of protection against that volatility. With this in mind, whilst 2022 has been a very challenging investment environment, our investment approach of providing a diverse, risk rated and lower cost solution has held up well over 2022 on a comparative basis. This can be demonstrated in the following chart which compares our medium risk investment portfolio to the industry benchmark over the past 12 months.
The following is an update of all our BA Core Portfolios relative to their respective industry benchmarks:
Although 2022 has been a challenging year on many levels, with inflation appearing to have peaked, China starting to reopen to the world and unemployment remaining low, there is at least hope that the worst may be behind us as we move into 2023.
By Julian Strauss
Investment Director & Certified Financial Planner