2022 will be remembered for many things. Investors, however, will remember it as the year of the worst ever bond market performance and the first year since the late 1960s that both bonds and equities lost money. Rampant inflation and an aggressive Fed were the triggers, and few markets offered a refuge. The anti-fiat system play of cryptocurrencies produced dismal returns. Gold prices fell. The only markets that rose for the year were energy, agricultural commodities, and cash. Our call in May that cash would be king in the year of inflation turned out to be prescient.
How Equities and Bonds Performed in 2022
In terms of the details, global equities fell 15% this year, global bonds fell 15%, bitcoin fell 63%, commodities rose 14%, and cash returned 1% (Chart 1). Adjusting for volatility, bonds performed worse than crypto, delivering a Sharpe ratio of -2.3 (Chart 2). Meanwhile, crypto and equities had similar Sharpe ratios of around -1.0. Commodities had a positive Sharpe ratio of 0.6. However, while commodity returns were positive, all the gains were in the first half of the year. From mid-June onwards, they fell 18%.
In dollar terms, US, euro area and Japan equity markets fell around 16-18%, while the UK did better with only a 6% decline (Chart 3). Returns in local currencies were higher for non-US markets, meaning much of the losses for USD-based investors in 2022 was from dollar strength. Emerging markets (EM) fell 20% thanks to a sizeable decline of 23% in China. Other EM markets did better – Brazil was up 3%, and India was down 4%.
US government bonds fell 12%, which was similar to the 14% decline in Euro govvies (Chart 4). But UK govvies fell by most at 21%. This contrasts the stronger UK equity market performance. Japan govvies fell only 6%.
Elsewhere, inflation-linked bonds had a terrible year thanks mainly to the rise in interest rates. Clearly, inflation compensation on the coupons was not enough to offset the capital loss from declines in inflation-linked bond prices.
How Commodities and Crypto Performed in 2022
Within commodities, energy was up 36% and agricultural commodities were up 14% (Chart 5). However, both industrial and precious metals fell around 2%. The performances reversed in the last three months, though, with energy declining and metals rising. So, it was a year of two halves.
2022 has been a challenging year for crypto with numerous scandals, the most recent being the collapse of FTX. Both bitcoin and ethereum fell around 65% in 2022 (Chart 6). Out of the still existing larger coins, the Binance coin has fallen the least at 44%, while Solana has fallen most at 92%.
How to Position for 2023
As we go into 2023, markets have shown a more positive tone thanks to three factors:
- Fed is coming to the end of its hiking cycle – the Fed pivot.
- China is reopening.
- Europe’s energy problem has been managed.
Making a call on these three will therefore be key, especially the Fed pivot. At Macro Hive, we think the inflation dragon has not yet been slain, so we would caution against thinking the Fed is close to ending its hiking cycle. On the other two, the coming month will bring new information, so we wait for more clarity. Meanwhile, we continue to overweight cash.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.