2022 began with an optimistic tone which proved short-lived as the year became one of the worst for investors in recent memory. The outbreak of war in Europe and, in the UK, political in-fighting and the crass mishandling of a supposed radical mini-budget were amongst the reasons for the change in outlook.

Underlying all, we entered 2022 with markets expecting inflation to rise but to prove transitory and resume the trend to fall to the 2% target as the year unfolded. Yes, interest rates were rising, but again this was both necessary and containable.

The war in Ukraine and its impact on the global supply of food and energy changed perceptions as to how long inflation would remain elevated. Markets then focussed upon how entrenched higher inflation could become and how quickly and, indeed, how high interest rates would climb to quell it.

Global equities as measured by the MSCI Global Index fell 20% in 2022 mirroring the fall in the S&P 500 Index of leading US companies. Nasdaq, essentially the US Technology Index, gave up a third of its value. FTSE 100 fared rather better, rising by 0.9% as the weakness of the pound benefitted many larger companies with significant overseas earnings. BP and Shell helped performance as the oil price soared.

In previous bear markets, stability could be found switching to Sovereign Debt (gilts in the UK), a safe-haven investment benefitting from the security they offer whilst equities fall. Not in 2022. They, along with Corporate Debt, performed much worse than the FTSE 100 as interest rates rose strongly upsetting ‘fixed income’ investments.

Rising interest rates also provided a difficult background for alternative investments, particularly Infrastructure and Property, a situation that was exacerbated by the mini-budget fiasco. We have seen a partial, if not full recovery yet from that fall.

In China, the world’s second largest economy, the zero-Covid policy has been turned on its head after large-scale protests alongside the economic struggle of last year. The repeated lockdowns in major industrial cities were another inflationary problem as the supply of key goods and services faltered. The relaxing of rules carries danger of course but could be a move towards better coordinated global trade.

Negative annual returns in portfolios are a feature of long-term investment. They do not happen often and two years in a row is even more rare. The immediate outlook remains choppy, and the IMF predict a third of the world’s economies will suffer recession this year.

Recession does of course reduce consumption and inflation, which is already looking to have peaked and may fall quite sharply as the year progresses. Some prices are already in retreat. If this occurs, debt markets should respond well giving a firmer background for equities.