By Álvaro Antón Luna, Country Head Iberia, abrdn
At this time of year, it’s useful to look back and reflect on the highs, lows, and surprises brought by the year that is drawing to a close.
In keeping with the festive spirit, we’ve made an audit of the investment ‘turkeys’ of the year, which certainly didn’t fly. On a more cheerful note, we’ve also considered the ‘crackers’, which have brought plenty of seasonal cheer to portfolios.
The turkeys of 2022
Inflation Linked Bonds (TIP US Equity) – Down 10% (year-to-date)
In a year when inflation soared, US TIPS (Us Treasury Inflation Notes) have sunk, which certainly surprised those who thought they offered inflation protection. As if to highlight the fact that there is no perfect asset for an inflationary environment, only different assets that perform at different stages in the inflation overshoot cycle, TIPS sold off as the US Federal Reserve (the Fed) increased rates aggressively to salvage its credibility. However, if a recession occurs, they should perform strongly, even though this would be accompanied by a fall in inflation, as the capital gains from a rally in interest rates would dominate the fall in inflation income.
Technology/NASDAQ (NDX Index) – Down 28% (year-to-date)
This year, the companies most sensitive to changes in interest rates (the ‘growth’ investment style) gave back much of their 2021 outperformance. Following a sugar high, driven in large part by central bank liquidity during and after the pandemic, tech companies led the downturn in stocks. The non-profitable tech sub sector, in particular, fell 60%, as the appetite for more speculative investments waned. Currently, concerns around the outlook for advertising revenue as we head into a period of likely economic contraction, are weighing on the sector.
Bitcoin (XBTUSD BGN CRN) – Down 60% (year-to-date)
This year, the companies most sensitive to changes in interest rates (the ‘growth’ investment style) gave back much of their 2021 outperformance. Following a sugar high, driven in large part by central bank liquidity during and after the pandemic, tech companies led the downturn in stocks. The non-profitable tech sub sector, in particular, fell 60%, as the appetite for more speculative investments waned. Currently, concerns around the outlook for advertising revenue as we head into a period of likely economic contraction, are weighing on the sector.
The crackers of 2022
US dollar (DXY Index) – Up 10% (year-to-date)
Even as the media fretted about a loss of credibility from the Fed, and a debasement of the purchasing power of money, the value of the dollar has surged versus its G10 peers. The Fed raised rates more aggressively than Europe, the UK and in particular Japan, helping make US currency more attractive to investors. As the value of the dollar fell versus a basket of goods and services (the very meaning of inflation), it surged against G10 currencies, netting profits for those gaining exposure to dollar cash from offshore. Dollar Fiat, in that sense, was a good investment in 2022.
Oil and Gas equities (IEO US Equity) – Up 60% (year-to-date)
Supported by the supply-chain disruptions that occurred as a consequence of the war between Russia and Ukraine, the price of energy soared in the first half of the year, although it has moderated since the summer. While the price rise has put pressure on households, it has been a source of gains for investors in commodities and equities in the US energy sector. The iShares Oil & Gas ETF is up 60% on the year, far outpacing the broad S&P index, which is down 15%.
Turkey (TUR US Equity) – Up 80% (year-to-date)
In a year that saw inflation in Turkey surge above 80%, and the central bank taking the unconventional strategy of cutting rates instead of increasing them to fight the price pressures, the currency has fallen 30%. A country in crisis would be expected to generate poor return to investors, yet foreigners investing in Turkey equities on a US dollar basis have seen the best return in global equity markets, driven by a stratospheric increase in the earnings per share of the index.
So, in the kind of pun often heard at the Christmas dinner table – Turkey has proved to be a cracker.
