Global equity markets suffered a sharp reversal of fortunes in 2022, tumbling from record highs to post their weakest annual performance since the global financial crisis. On the plus side, the fall in equity prices returned stock valuations towards their historical averages, while presenting new opportunities for active investors in the year ahead.
Overall, 2022 was characterised by its broad "risk-off" sentiment, with most asset classes including fixed income declining in lockstep with equities.
The MSCI World Index ended the year 18% lower, with U.S. equities among the worst performers among developed countries. Growth and technology stocks were hit especially hard a accelerating inflation and increased borrowing costs dented earnings sentiment. Portugal was the only developed market to post positive returns in 2022, although this was due in large part to strong returns by local energy giant, GALP Energia.
In general, emerging markets fared slightly worse than their developed peers as rising U.S. interest rates attracted investors towards dollar assets. The MSCI Emerging Markets Index ended the year 20% down, with Chinese and Korean equities leading the way lower and Brazil a rare outlier as rising commodity prices proved a boon to local resource companies.
Large cap equities generally fared better in developed markets than their small cap peers, while the opposite was true in emerging markets.
In terms of sectors, the sole bright spot was provided by energy stocks, which posted strong gains of more than 35% during the year as oil and gas prices soared. Conversely, the auto industry struggled the most, falling 46% as high interest rates, supply chain disruptions and recession fears hit sentiment.
After years of unrelenting growth, 2022 provided a reckoning for companies in the communication services and information technology sectors, with the latter underperforming the broader market for the first time in ten years. Consumer discretionary companies were also predictably weaker on inflationary concerns and reduced demand.
Against this challenging backdrop, ADIA's Equities Department (EQD) continued to concentrate its active management capabilities in areas with structural advantages and strong prospects for future relative growth. In 2022, EQD complemented its existing risk exposures in preferred markets by allocating additional capital to high turnover strategies with low volatility. It also added several high conviction strategies with higher volatility profiles.
Looking ahead, while challenges remain, there is scope for cautious optimism for public equity investors in 2023, with equity valuations contracting to more attractive levels. The price-to-earnings (PE) ratio for the MSCI AC World Index fell to 15.0 in 2022, from 19.6, while the average U.S. PE ratio slid even further to 17.8 from 23.9.
The heightened volatility and complex market conditions also provide a more favourable environment for active managers. This contrasts with the "beta trade" of recent years, in which a rising economic tide carried most growth stocks higher, while punishing investors who sought to differentiate companies by relative valuation, among other factors.
On a regional basis, China is likely to be a key focus in 2023 as it emerges from pandemic lockdowns, while markets that were particularly affected last year, such as the U.K., may provide opportunities. Some of the hardest hit sectors in 2022 are also likely to stabilise. However, any sustained rebound will depend on factors such as inflation, central bank policies and the trajectory of economic recovery in major markets.
