The global economy continues to show remarkable resilience

Despite multiple headwinds, the global economy continues to show remarkable resilience, ending 2022 on a positive note, write Guy Wagner and his team in their latest monthly market report “Highlights”.

“In the US, a robust labour market, excess savings from the pandemic and sustained wage growth are  keeping consumer propensity to spend at a high level, with service activities continuing to benefit from  a catch-up effect”, says Guy Wagner, Chief Investment Officer (CIO) of the asset management company  BLI – Banque de Luxembourg Investments. “Thanks in part to rising prices, corporate revenues and  profits also remain robust, supporting investment spending. In the euro area, the outcome whether  growth was positive or negative in the fourth quarter is less obvious. Domestic consumption might also  prove sufficiently robust to offset the moderation in industrial activity.” 

China’s economy should recover in the second quarter at the latest  

In China, the cessation of the zero-covid policy triggered a sharp increase in coronavirus infections,  leading to a sharp slowdown in activity at the end of the year. “However, the gradual normalisation of  the health situation should ensure a cyclical recovery from the second quarter at the latest”, guesses  the Luxembourgish economist. In Japan, weakening external demand could slow export growth, the  country’s main economic driver. 

The major central banks continue to increase their key interest rates 

In line with expectations, the US Federal Reserve’s Monetary Committee continued to tighten monetary  policy in December. The increase in the target range for the federal funds rate was not 75 basis points  as in the previous four meetings, but, as pre-announced, 50 basis points. As a result, the effective  federal funds rate is currently 4.25% to 4.50%. For 2023, the Monetary Committee expects further  tightening of 75 basis points in successive 0.25% increments. In Europe, the Governing Council of the  Central Bank also raised its key interest rates by 50 basis points, bringing its deposit rate to 2% and its  refinancing rate to 2.5%. President Christine Lagarde struck a particularly hawkish tone, suggesting  continued upward movements in 0.5% increments and announcing the start of quantitative tightening  from March. In Japan, the central bank adjusted the upper limit of the 10-year rate from 0.25% to 0.50%  as part of its yield curve control policy. According to President Kuroda, this move is not the beginning of a tightening cycle, but it results from the need to remedy the dysfunction observed in the government  bond market. 

Rise in yields on the bond markets 

Continued monetary tightening by central banks led to a rise in long term interest rates. The rise in bond  yields was particularly pronounced in Europe due to the prospect of additional key interest rate hikes in  50 basis point increments by the ECB. The benchmark 10-year rate rose in Germany, in France, in Italy  and in Spain. 

Energy was the only sector to post a big positive performance in 2022 

In December, equity markets weakened significantly, leading most stock market indices to record  significant losses for the full year. “The decline in stock prices is the result of the monetary tightening by  central banks, which led to a reduction in valuation multiples, primarily affecting so-called growth stocks  in almost all regions.” Thus, the MSCI All Country World Index Net Total Return expressed in euro fell  by 13.0% over the full year 2022. The year-on-year decline in the index would have been even larger  had it not been mitigated by the strength of the dollar against the European currency. At the regional  level, the S&P 500 in the US fell over the month, as did the Stoxx 600 in Europe, the Topix in Japan and  the MSCI Emerging Markets Index. “At the sector level, utilities, healthcare and consumer staples held  up best during December, while communication services, consumer discretionary and technology  declined the most. For the full year 2022, energy was the only sector to post a big positive performance,  while all other sectors were down on the year”, concludes Guy Wagner. 

Source: BLI - Banque de Luxembourg Investments