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Annual Market Review 2022


Belvedere Group

Developed Equities
As we turn the page to 2023, markets remain volatile. On a year to date basis as of 30 December 2022, the energy sector outperformed other sectors by delivering a return of 47.3%. This return was driven by the high energy prices we witnessed last year, as a result of the Russian invasion of Ukraine. We believe that oil prices will remain volatile as cease-fire talks seem far from sight.

In analysing the revenue generated by each region, Americas continues to dominate, as it was responsible for generating over 50.52% of the total revenue of developed equities. Asia/Pacific and Europe drove 23.02% and 23.24% of the market revenue as of 2022-year end. We believe that the drop in Asia/Pacific’s revenue when compared to 2021, when it generated over 28.25% of the developed markets equity was due to the persistent lockdown in China.

Source: FactSet Dec 31st 2022

As of year-end 2022, the MSCI World index which represents global developed markets had a negative return of -18.84% YTD. However, as we are long term investors, it is important to consider that an investment of $10k in the developed markets index ten years ago, would yield a return of 134%, making it over $23k as of Dec 2022. The growth of $10k chart below demonstrates the importance of staying invested. As you will observe, the S&P dominated both global developed markets and the FTSE 100 index. A reason for this, is that over long periods the S&P 500 earnings have grown at a mid-to-high-single digit rate per year on average, as have equity markets. Historical presidents have taught us that it would be reckless to wait until the economy and corporate earnings expectations fall before investing if you had forecasted accurately and sold 12 months ago, or if you are concerned about the trajectory for earnings today.

In 2022, the FTSE 100 index outperformed the S&P 500 by 11.5%. This was because the S&P 500 declined by -18.51% YTD on a net basis, whilst the FTSE 100 declined by -7.04% YTD. We believe that this decline is explained by the forward P/E multiple contraction of nearly 25% - from 21.7x at the start of 2022 to 16.6x by year-end. The increase in the 10-year Treasure yield from 1.5% to virtually 3.9% at year-end explains the compression in valuation, particularly for equities with higher multiples, mainly during the first half of the year. As bleak as equity returns were last year, the second half was effectively flat for the S&P 500.

Source: FactSet Dec 31st 2022

The chart below visualises the top five performing developed markets stocks in 2022. An observation is that all five stocks are large cap companies listed on the NYSE. Exxon Mobil returned 87.36% YTD, which led the MSCI index with a contribution to return of 0.37%. The increase in oil prices caused by the Russian Invasion of Ukraine sparked tension which disrupted supply chains and sent oil prices north. This led to an increase in Exxon Mobil’s revenue and stock price respectively. Chevron returned 58.48% YTD, this was attributed to strong fuel margins, high prices for natural gas and oil, and its boosted share buyback to $15 billion from $10 billion, matching the levels set by its nemesis Exxon.

Merck returned 49.38% YTD, making it the top-performing US biotech stock in 2022. It returned its best share return since 1995, and this was driven by the company’s record of positive outcomes and approvals. It outperformed the drug manufacturing industry group by 28.78% YTD. The European Commission recently approved its Pneumococcal 15-valent Conjugate Vaccine and its cancer drug, keytruda, had a positive phase three trial for use in treating gastric cancer. We forecast a positive trend in Merck’s performance as the company strives to add depth to its drug development with a recent announcement to acquire Imago Biosciences Inc. and talks of a potential acquisition of Seagen Inc. We believe that companies with solid fundamentals and a fortress of moats will continue to outperform in 2023.

Top 5 Highest Performing Developed Markets Stocks:

Source: FactSet Dec 31st 2022

Developed Fixed Income Markets

The chart below displays the trend performance of developed equities vs the US 10-year Treasury. In 2022, the US 10-year Treasury had a positive yield of 2.94% as of December 2022 while the MSCI World had a negative net return of -18.84% for the same period. For context, an investment of $10,000 at the beginning of 2022 in the MSCI World Index would stand at $8,116 YTD, while a similar investment of $10,000 in the US 10-year treasury would be $10,294 at the end of 2022. The fixed income space is an attractive asset class for investors who seek safety and protection of capital, along with the reasonable return it provides and historically, during stock market selloffs, investors' sentiment tends to move with bonds as a "safe-haven” asset class.

MSCI World vs US 10-Year Treasury:

Source: Yahoo Finance

Global economic activity is witnessing a broad-based slowdown, with inflation higher than seen in several decades. The tightening financial conditions in most regions, Russia’s invasion of Ukraine, cost-of-living crisis in the UK and the lingering covid-19 pandemic all weigh negatively on the outlook. The International Monetary Fund (IMF) forecasted GDP growth to slow from 6.0% in 2021 to 3.2% in 2022 and 2.7% in 2023. This is the most fragile growth profile recorded since 2001, except for the financial crisis and the peak stages of the covid-19 pandemic. In addition, global inflation is forecasted to rise from 4.7% in 2021 to 8.8% in 2022 but to decline to 6.5% in 2023 and to 4.1% by 2024. We believe that policymakers would remain focused in restoring price stability and alleviating cost-of-living pressures.

MSCI World vs US 10-Year Treasury:

Source: Statista

The Federal Reserve raised the fed funds rate six times in 2022 from the record low of 0-0.25% to cushion the effect of the pandemic. In its last monetary policy meeting of 2022, the Fed hiked rate by 50 bps to 4.25%-4.5% (previously: 3.75% - 4%), pushing borrowing costs to the highest level since 2007, and in line with market expectations. Fed officials have also signalled their intention to lift the rate above 5% in 2023 and keep it there throughout the year. The increase broke a string of four straight three-quarter point hikes, the most aggressive policy moves since the early 1980s. These aggressive actions in 2022 were taken by the Fed in its bid to fight against the lingering increases in the prices of goods and services in the US.

The rate hike decision and the latest economic projections underscore the Fed’s commitment to wrangling inflation under control, even if it’s at the detriment of an economic recession. But the efforts to combat inflation carry’s a potential risk of recession, with a growing number of economists and Wall Street firms forecasting an economic downturn in 2023. For context, an increase in interest rates tends to create higher rates on consumer and business loans, which causes a slowdown in the economy by forcing employers to cut back on spending and trimming their workforce. The rate hike also translates to an increase in borrowing costs for individuals, businesses, and governments. Thus, the Fed expects that the interest rate increase would help slow demand for goods and services and subsequently have a grip on the rising prices. Fed rate hikes in 2022 contributed to a surge in the value of the U.S dollar (USD) in 2022. This created challenges for non-U.S. borrowers, both private and public, who are reliant on USD stocking. We will continue to monitor this trend in 2023.

US Inflation Rate Trend:

Source: Statista

As the global financial markets continue to react to the rate hike by the US, we expect the FOMC to continue in this aggressive stance in its subsequent monetary policy meetings, by increasing interest rates further as it tries to put a grip on the soaring inflation in the country. However, we expect the Fed to act with caution in subsequent rate decisions. Subsequent rate decisions as these might come in response to price changes this year. In similar light, the Bank of England’s Monetary Policy Committee in December 2022 voted in favour of a half-percentage point hike (50bps), which takes the bank rate to 3.5% (previously: 3%) and signals its eighth increase in 2022. Having hit a 41-year high in October, the annual rise in the U.K. consumer price index slowed to 10.7% in November. This rise marks a slowdown from November’s 75 basis point increase.

The slowdown showed signs across other major economies such as the U.S. and Germany that inflation may have peaked, though it remains well above the Bank of England’s 2% target. The labour market in the UK remains tight and there have been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence thus, justifies a further forceful monetary policy response. We expect inflation to fall gradually over the first quarter of 2023 as earlier rises in energy and other goods prices drop out of the annual comparisons.

Macro-Economic Indicators for Developed Markets:

Source: Trading Economics

Following Russia’s invasion of Ukraine in February 2022, there were negative reactions from financial markets across the world. Investors and monetary authorities across various economies began to weigh the extent of this invasion and the likely consequences on financial markets. More importantly, the Russia/Ukraine crisis raised concerns about the possible disruptions for oil production as Russia is one of the top 10 producers of oil in the world. On a global front, most economies have imposed strict sanctions on the Russian economy in reaction to the invasion.

These sanctions have come in varying dimensions such as the ban on Russian flights through European airspace, prohibition of Russian Bank’s access to the SWIFT system, the freezing of assets belonging to the Russian central bank and influential nationals of the country. These sanctions aim to deprive the country of its foreign reserves and cripple its financial stability, which might deter it from prolonging the war. We believe that the war will continue to adversely impact the global economy and increase the awareness of the dependencies of Russia's commodities and gas.

Brent Crude Oil Prices (in USD):

Source: Statista

Further analysis in 2022 showed that the real estate industry is growing beyond the headwinds we discussed in the developed markets. The global real estate market size is expected to attain a CAGR of 5.2% from 2022 to 2030. The market is estimated to be valued at $3.8 trillion. Factors such as the increasing demand for housing and population rising are likely to remain catalysts for the growth of the market. The Asia-Pacific region had remained dominant with over 50% in market share by Revenue. For context, China accounts for the largest share in the region, largely driven by the increasing level of population which supports real estate development and investment. Similarly, the Middle East region is expected to experience growth in the coming years, attributed to the rising consumer spending on traveling and investment.

Environmental, social and governance (ESG)

We believe that ESG is a future looking approach to navigating investments without sacrificing returns to invest in sustainable companies. In 2022, the UK’s FCA released proposed regulations to create a U.K. sustainability disclosure regime (SDR), offering a U.K. perspective on a subject that many investment managers have been dealing with in anticipation of the Sustainable Finance Disclosure Regulation (SFDR) of the EU. These regulations are expected to establish anti-greenwashing guidelines, adopt a fund labelling scheme, and demand disclosures at both the manager- and product-level.

In the US, there have been a sharp increase in incorporating ESG to investment processes. The number of professionally managed portfolios which incorporates ESG assessments currently exceeds USD 17.5 trillion globally, according to the OED. Additionally, the value of traded investment products related to ESG that are offered to institutional and individual investors has surpassed USD 1 trillion and is still rising swiftly on the world's major financial markets. Although ESG data formerly had a more ad hoc function in the investing process, a more methodical approach to ESG integration is now proving to be quite effective. The ESG investments ecosystem, however, is still a relatively new idea. Since the effects of climate change on the environment have been apparent, ESG policies have gained traction.

In 2023, we believe that several trends such as regulations and ESG pushback from last year will continue. 2022 laid the foundation for regulation and 2023 will be the year that some of the initial regulation will be put into practice, particularly in the EU, which have been dominant in the ESG space. We observed that biodiversity is an emerging theme in the environmental space but we are in early stages of knowing how best to integrate it into analysis and investment decisions. An interesting question that is top of mind for us in 2023, is Leaders vs improvers? i.e. should we be investing in transitioning companies. In light of the war in Ukraine, we are seeing the importance of the heavy reliance on fossil fuels to renewables. In 2023, we will continue to report on how new regulations are tackling greenwashing.

Developed Markets Outlook for 2023

In the initial trading days of 2023, we have observed that capital markets seem to have priced in a significant global economic slowdown. We continue to ask ourselves if this deceleration will end in a “soft landing” – with sluggish but positive growth or in a recession that drags down earnings. The FED and other major central banks hold the key to the outcome of a recession, as they continue efforts to bring inflation under control by raising interest rates and draining liquidity from the markets.

As we previously discussed, geopolitical risks continue to be a potential trigger for downside volatility in 2023. Structural factors such as, bank capital requirements that constrain market liquidity, could expand price movements both north and south. As most central banks are in quest of tighter financial conditions, investors can’t count on them to intervene if markets fall. But excessive pessimism and volatility can generate enormous value for nimble investors.

In 2023, investors are at a distinctive turning point in the history of markets, as the global economy has emerged from decades of declining interest rates into a new regime manifested by tenacious inflationary pressures and soaring rates. Regime changes comes with its unique set of risks. Nonetheless, markets may have exaggerated some of those risks in 2022 thereby, creating attractive potential opportunities for investors willing to be selectively contrarian with their investment strategy. Notable trends are: valuations in most global equity markets have been evidently enhanced, however, U.S. equities remains expensive relative to its historical valuation. Fixed income yields have emerged at attractive levels, given what seems to be a controllable stance for credit downgrades and defaults. Structural challenges could enhance capital spending on supply chains and renewable energy development, presenting investors with the opportunity to seek the new winners.

Emerging Markets Review

Emerging Markets Macro Environment

Last year was a challenging year for investors in emerging market equities, with returns differing greatly between countries. As of December 2022, the MSCI Emerging Markets Index had fallen approximately 20%, marking its second year of negative returns, with some of the index's largest components, such as China and Korea, leading the way down. However, several of the index's smaller markets, such as Turkey, Chile, and Peru, achieved extraordinary advances amid a tough macroeconomic environment.

Brent Crude Oil Prices (in USD):

Source: FactSet

A major contributor to this poor performance is the fact that China accounts for one-third of the capitalization of the index, and is one of the largest trading partners of virtually every emerging market country. Due to its regulatory crackdowns on global technology franchises, debt restructuring restrictions, and zero-covid policy, the country's economic momentum was interrupted. Eastern Europe was the worst-performing region in 2022, owing primarily to the Russia-Ukraine war and also to the performance of Hungary and Poland stocks, while Latin America led the emerging markets with Chile, Peru, and Brazil topping the list. Central and Eastern European countries close to Ukraine, such as Poland and Hungary experienced substantial inflation when commodity prices spiked. This resulted in the high cost of international travel. As you will see in the charts below, core inflation in Hungary spiked to 24.8% in December 2022, from 7.4% in January. Similarly, in Poland inflation increased by 16.6% in December 2022, compared to the same month last year.

Hungary Core Inflation Rate:

Source: Statista 2023

Monthly consumer price index (CPI) change of goods and services in Poland from 2018 to 2022:

Source: Statista 2023

Russia accounts for 3% of Hungarian imports, while Ukraine accounts for 1.5%. Hungary often has a trade deficit with Russia since Russia supplied approximately 80% of the gas and 64% of the oil consumed in the country. However, Ukraine the world's largest exporter of grain, was unable to produce and export the required amount. We believe that this will create an opportunity for Hungary, which is a net exporter of grain. North Africa and Middle Eastern economies are significant trading partners for Ukraine and Russia. However, these countries have seen supply interruptions, particularly in food and a rise in commodity prices. Commodity exporters, particularly those of oil and gas (Algeria, Colombia, and Gulf countries), agricultural products (Argentina, Brazil), and metals (Chile, South Africa), benefited from the price increases.

Trade exposure to Russian-Ukraine war:

Source: Statista 2023

The chart above visualises both the most vulnerable countries (red highlight) and countries that benefited (blue highlight) from the war. Emerging market countries have seen their economic growth disparity narrow since the end of the commodity super cycle. In Q1'22, this premium reached its lowest point ever. As leading indicators point in their direction, we expect it to widen in their favour.

Emerging Markets Real GDP Which Indicates Economic Growth:

Source: International Monetary Fund, Haver Analytics

Over the last two years, inflation has risen sharply due to several reasons such as supply bottlenecks, robust consumption as economies reopened, a commodity price shock from the Russia-Ukraine war, and supportive monetary policy. Governments in emerging markets reacted to these factors by tightening both monetary and fiscal policies. As inflation began to rise, many emerging market central banks, notably those in Hungary, Poland, Mexico, and Chile, began raising interest rates early and aggressively. Inflation in Brazil peaked to more than 12% in April 2022 and has since dipped to below 6%. The current rate is 5.79%. In Singapore, inflation plummeted to 6.7%, much below the 7.5% for August and September 2022. In January 2022, the inflation rate was 4%. The high inflation in Q1'22 and Q2'22, as well as growing costs of goods and services, and uncertain revenue growth, weighed on corporate earnings, affecting the MSCI index during this period. We observed that government bond yield curves have inverted in some Latin American and Eastern European countries where inflation is exceptionally high.

Inflation in Emerging Markets:

Source: National Statistics, JPMorgan forecast

With inflation projected to slow and economic growth expected to moderate, many developing market central banks may be able to focus on reducing rather than raising interest rates. We anticipate that supply bottlenecks will be alleviated as a result of unrestricted mobility, as freight and port delays would be reduced. The momentum as countries reopened from the Covid-19 pandemic’s lockdown was carried over into the first half of 2022. Global trade volume reached a record $32trn for the year, buoyed by high energy prices. Meanwhile, throughout 2022 China’s zero-Covid-19 policy to help combat a spike in coronavirus case numbers prompted an economic slowdown, limiting manufacturing output and suppressing consumer demands. The widespread measures have included restrictions on movement as well as the closure of businesses.

These policies had ripple effects across emerging markets, especially those whose manufacturing outputs are exported to China. For example, Taiwan, Vietnam, Mongolia, Singapore, the Republic of Congo, Oman and Namibia are emerging countries that trade with China. However, in Q4'22, the emerging markets rallied and had the biggest gain of 10.5 points since the commodity boom of the early 2000s. This was attributed to the massive return of 14.83 points in November and hints of China easing its rigid COVID policies, which had weighed on economic activities, and the government's desire to strengthen US-China relations. This in turn presents opportunities for emerging markets to fill production and manufacturing gaps, to develop stronger regional and global trade relationships. China’s GDP before the Covid policy shift is visualized below.

China GDP over time:

Source: Statista 2023

China's economic resurgence will be sparked by the removal of pandemic limitations as it adapts to the Covid virus. Property investment, which accounts for up to 30% of China's GDP, fell by 9.8% in the first 11 months of the year. We anticipate an improvement in Chinese GDP growth in 2023, which would be enabled by infrastructure spending, a revival in the housing sector, and the relaxation of Covid-19 limitations.

Emerging Markets Fixed Income

Chinese government bonds are commonly used as a benchmark for fixed income in this region. Chinese government bonds had the greatest performance among government assets in a global benchmark index in 2022 as they completed the year with a small single-digit return. The yield on China's 10-year government bond was around 2.9% in January, close to a 13-month high of 3% on December 12th, as investors assessed the Covid situation in the country and economic prospects for 2023. After three years of virus-related restrictions, China finally ended the zero-covid policy by reopening its borders a few weeks before the Lunar New Year holidays. The increase in infections that followed the easing since early December gave rise to worries that the recovery of the economy might take longer than anticipated. Beijing will announce its GDP target for 2023 in March. China's government targeted 5.5% GDP growth for 2022, but President Xi Jinping recently estimated it at a lower 4.4%.

China Government Bond 10Y:

Source: Statista 2023


Over the past decade, emerging market currencies in aggregate have depreciated around 50% versus the dollar, but in the event of the dollar achieving peak levels, fundamentals might regain their strength. China's recent policy measures to ease covid restrictions could boost emerging market growth, and emerging markets' currencies are now more attractive than ever. If emerging markets' growth differential widens in favour of emerging markets, as we expect, emerging markets currencies will finally have a catalyst for sustained outperformance. Therefore, we expect local currencies to gain around 4% - 6% versus the dollar over the next year.

Emerging Markets Equities

Top 5 contributors to the Emerging Markets Equity Index:

Source: FactSet

Amidst the slowdown in 2022, Adani Enterprises returned 103.5% YTD. For context, a $10k investment in this stock at the start of the year, would have doubled to over $20k YTD. This stock operates in the mining industry, and is one of India’s largest business organisations. The surge in its return was a due to the increase in commodity prices on the backdrop of supply chain bottlenecks and the war in Ukraine. As you will se in the exposure chart above, India was one of the countries that benefited from the war. Petroleo Brasileiro SA, returned 55.37% YTD driven by the surge in oil prices. This company is domiciled in Brazil, and Brazil is Latin America’s top producer of oil. The country owns the largest recoverable ultra-deep oil reserves in the world, with 94% of Brazil’s oil production produced offshore. Crude oil exported from Brazil attained an average price of 0.7 dollars per kilogram, the highest in at least three and a half years, which elevated Petroleo Brasileiro’s stock performance.

Pinduoduo had a return of 39.88 YTD. The company sits in the agriculture industry. It connects farmers with consumers directly. The company, which has become China’s largest online market for agricultural products, posted strong fundamentals in 2022 coupled with strategies that would build sustainable high-quality growth and waived commissions to merchants selling agricultural products. This has given the stock a boost to outperform its peers like Alibaba. Vale S.A, is the fifth stock with the highest performance in the Emerging Markets index. Vale S.A. is a Brazilian multinational corporation that engages in metals, mining and logistics, it had a return of 31.87% YTD. Iron is the main driver of its revenue and profit. Recent price spikes boosted its financial performance, but those gains are already starting to reverse due to the significant volatility of iron ore prices, which usually affects their stock price directly.

China's covid policy relaxation is an example of how such highly cyclical industries can see massive market moves on the slightest change in the global economic outlook. An observation is that the top 5 stocks with the highest performance in the index operates within the commodity and agriculture industries. As Russian energy exports are being curtailed, there is a global energy supply crisis which could escalate. However, we expect these stocks to continue to outperform the index as China re-opens its economy.

Environmental, Social and governance (ESG)

As China continues in its efforts to make its economy more ecologically friendly and foster social equity, the idea of ESG reporting is gradually becoming more popular. The year 2022 ended abruptly with a fast-track reopening. Within the space of a month, China has lifted the majority of the limitations connected to covid, pledged to boost housing market assistance, and implemented pro-growth measures. Considering this, businesses must begin shifting to a lower-carbon business model if China is to attain peak carbon by 2030 and achieve carbon neutrality by 2060. Corporate reporting on a full range of ESG criteria will assist regulators to make prompt policy adjustments and direct capital flows. Regardless of the current scope of practice, it is clear that Chinese authorities will become increasingly sensitive to corporate ESG reporting to fulfil key green economy policy goals.

ESG reporting by Chinese businesses is still in its infancy and the industry and government have specific regulations which varies widely. The recently released CERDS voluntary guidelines on ESG disclosure standards could serve as the framework for a reporting system with a focus on China. The guidance from CERDs lays a strong emphasis on compliance with Chinese law, therefore reporting requirements are expected to differ significantly from US or EU frameworks even though these disclosure criteria have some parallels to ESG reporting norms in other jurisdictions. Looking ahead, there is little doubt that for the foreseeable future, ESG issues for Chinese assets will continue to be a contentious and sensitive subject because they cover a wide range of differing beliefs and viewpoints. In terms of the E, S, and G factors, China is making significant achievements in some sectors while investors would like to see even greater advancements in other areas. Furthermore, it is evident that choosing to invest in Chinese state-owned assets differs greatly from choosing to do so in Chinese private businesses.

The majority of Emerging Markets nations have developed "Green Plans for 2030," which are roadmaps for sustainable development over the next several years. The Green Plan has goals for Singapore that include being a major hub for green finance in Asia and worldwide. The implementation of a uniform set of international disclosure and reporting standards, an improvement in the quality, accessibility, and comparability of data, and the creation of taxonomies for green and transitional activities are just a few of the requirements that have been identified for green finance to function effectively. 

Organizations are vying for access to the roadmap to comply with ESG norms and requirements as the ESG market expands quickly around the world as a result of investor demand and government legislation.

Emerging Markets Outlook for 2023

In 2023, we believe that China's reopening might result in a growth spurt that will significantly affect Hong Kong and Thailand in terms of mainland tourism and Asia-Pacific manufacturing and trade. It is, however, feared that the reopening would lead to a large wave of infections and drop in mobility and economic activity. As a result, we have a doubt as to whether the economy will rebound in the coming weeks.

We expect Inbound tourism and spending to rise sharply in Hong Kong and Thailand as mainland Chinese tourists resume traveling abroad. In the coming quarters, both economies are expected to grow significantly. There is a possibility that the Indian central bank will tighten more than markets expect in H1 as a result of strong growth and resilient core inflation. We believe the Bank of Korea may be one of the first to cut interest rates late in the year, after pressures have eased.

We expect energy prices to peak after the resumption in travel as demand would increase and this could push up global oil prices significantly. We expect the Fed hikes to end in H1 as the US would focus on strategies to avoid recession, and regional growth bottom up later in the year, we expect the CNY and JPY to rally further against the USD.

We believe that central banks will most certainly be compelled to pivot and indicate interest rate cuts, resulting in a prolonged recovery of asset prices and ultimately, the economy by the end of the year. More economic weakness, higher unemployment, market volatility, a reduction in risky asset levels, and a fall in inflation will be required for this shift to occur. We believe it is time for investors to take a contrarian view in determining their exposure to onshore Chinese companies, as well as other emerging markets countries.

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