Events in 2022 served as a potent reminder of the ability of financial markets to surprise, underscoring the benefits of an investment strategy that views change as a constant, not an aberrant event.
The dominant theme of 2022 was the return of inflation, after more than a decade of stagnant or declining prices. In addition to pent-up demand following the global pandemic, energy prices and supply chain dislocations further accelerated the trend.
Global central banks responded by reversing their policy settings – tentatively at first, and then with full conviction – as concerns grew that inflation may become entrenched despite a sharp decline in most commodity prices, including energy. The U.S. benchmark interest rate rose from near zero to 4.5% by year end, in what was the most aggressive policy action by the Federal Reserve in four decades.
Financial markets appeared caught off guard by the speed and extent of the response. Prices of most assets fell in unison, challenging conventional notions of the relative performance of different asset classes.
The MSCI World Equity Index ended the year 18% lower, with growth and technology companies among the hardest hit as fears of recession and increased borrowing costs dented sentiment. Bonds fared little better, with longer-dated government bonds particularly affected. The yield on 10-year U.S. Treasurys climbed to its highest level since the global financial crisis, ending 2022 at 3.9% compared with 1.5% at the end of 2021.
Against this backdrop, ADIA's substantial efforts over recent years to increase its investing flexibility and operational agility paid dividends, enabling it to make swift portfolio adjustments as market conditions evolved during 2022. ADIA was also successful in capturing pockets of absolute return across asset classes, underlining the value of its diversified portfolio in a year where equities and bonds experienced an atypical correlation.
On the risk management front, ADIA was well equipped to navigate 2022 at a total portfolio level. It benefited from having previously combined many of its middle and back-office activities into a specialised department with an enhanced mandate. Meanwhile, ADIA continued to explore data-driven and quantitative strategies at both a total portfolio and asset-class level.
As at 31 December 2022, ADIA's 20-year and 30-year annualised rates of return, on a point-to-point basis, were 7.1% and 7.0% respectively*, compared to 7.3% and 7.3% in 2021.
* Performance is measured based on underlying audited financial data and calculated on a time-weighted basis. Performance for 2022 remains provisional until final data for non-listed assets is included.
Portfolio overview Active versus Passive Management
Portfolio overview Internal versus External Management
In 2023, financial markets will likely remain vulnerable to a range of external influences. These include the trajectory of global growth and inflation, the possible negative consequences of monetary tightening on financial institutions, and ongoing geopolitical risks.
On a fundamental level, it is clear that the era of low inflation and cheap money that propelled risk assets higher following the global financial crisis has drawn to a close. Investors will now be required to navigate a less benign landscape marked by higher inflation and borrowing costs.
This situation presents both challenges and opportunities. Higher and more volatile inflation tends to impact asset valuations by raising doubts about future earnings and growth prospects. It can also complicate diversification strategies and erode the real value of assets with fixed returns, such as cash or bonds.
However, equities – both public and private – should continue to find support, especially if profitability remains resilient despite lingering tensions in supply chains and the availability of labour.
The new landscape may also increase the appeal of physical assets and alternative approaches that are better suited to managing inflation risk. One positive consequence of this trend may be greater alignment between investment goals and societal imperatives. Over time, global investors have played a vital role in supporting and accelerating social progress and this is expected to continue. One example is investment in infrastructure projects, where estimates suggest that more than $3 trillion a year is needed to support global economic growth aspirations and provide citizens with essential services. Importantly, this includes ventures aimed at accelerating the energy transition.
ADIA is clear-sighted about the profound impact that climate change will continue to have on the investment landscape and the opportunities that it presents. In 2022, ADIA co-hosted the One Planet Sovereign Wealth Funds (OPSWF) CEO Summit in Abu Dhabi, which convened global institutional investors with combined assets exceeding $37 trillion. At this gathering, the OPSWF was established as a permanent platform for increased collaboration between global institutional investors on energy transition themes. ADIA's prioritization of this issue is closely aligned with that of the UAE as a whole, as demonstrated by the country's role as host of the 2023 UN Climate Change Conference, also known as COP 28.
Looking ahead, the world faces numerous, complex challenges both on the economic and geopolitical fronts. It is inevitable that nations will continue to assert themselves and challenge long-established hierarchies. In parallel, rising debt levels with higher interest rates will make it more difficult for governments to maintain the public services that their citizens expect.
While these factors cannot be underestimated, there is also cause for optimism about the opportunities brought by technological advances. This includes the digitalisation of economies across all areas, from production to distribution and consumption. A key driver of this process is the increasing availability of data and the ability to process it using advanced computing technologies such as artificial intelligence, machine learning, and data analytics. And while businesses are already benefiting from this trend, it has even greater implications for finding solutions to some of the world's most pressing issues.
This was the motivation behind the creation of ADIA Lab, an independent research institution that operates at arm's length from ADIA and is dedicated to basic and applied research in data and computational sciences. With a mandate that extends beyond investment-related applications, ADIA Lab has attracted an Advisory Board of global thought leaders in data and computationally intensive fields and has already begun to collaborate with academic institutions both in the UAE and internationally. As it grows, the Lab will play a proactive role in contributing to the continued development of Abu Dhabi's digital ecosystem and aims to support projects that could lead to the creation of start-ups.
In conclusion, we have always believed that change and uncertainty are core features of the investing landscape and should be welcomed, rather than feared. We are enthusiastic about the opportunities that lie ahead, and in our ability to continue to deliver on our mission long into the future.
