Equities Suffered Brutal Year As Inflation Fight Raged

By Mark Barnes, PhD, and Christine Haggerty, Global Investment Research

Global equities closed out their worst year since the 2008 financial crisis as central banks launched increasingly aggressive efforts to bring rampant (and partly war-fuelled) inflation under control. The ensuing seismic rotation into inflation beneficiaries and defensive plays brought big gains for energy and UK stocks – and grief for pricier tech and US stocks.

Despite pullbacks in December, most equity markets posted strong gains in Q4, with Europe, the UK, and Asia Pacific outpacing the FTSE All-World and peers in Japan and the US. The Emerging index staged a robust comeback in Q4, paced by rebounds of 10-12% in China, South Africa, and Mexico. Amid the full-year carnage, the UK and Japan fared best (with the UK rising nearly 5%), while the large- and small-cap US indices suffered the most, with losses of 19-20%.

Global equity returns (LC %) – Fourth Quarter and Full Year 2022

As shown in the chart below, the US was the only major regional market to post bigger losses than the global index for the full year.

Regional equity index returns relative to FTSE All-World (rebased, TR, LC)

Much of the US’s underperformance versus its peers is an outgrowth of its much larger exposure to the collapse in Technology and Consumer Discretionary stocks this past year, particularly relative to the extraordinary outperformance of Energy stocks. The two tech-heavy industries account for more than 38% of the US index, versus 25% for the FTSE All-World ex USA (and 11% in the UK). As we explored in depth in an earlier blog post, the dispersion between the strongest and weakest industry performers was unusually wide across markets last year, but exceptionally so in the US.

As the heat map of industry returns below illustrates, the spread between US Energy and Discretionary returns in 2022 was a whopping 98 percentage points. Except for the UK, no other market’s performance gap came anywhere close.

Regional industry returns and dispersion – Full Year 2022 (TR, LC %)

The impact of last year’s ‘tech wreck” on the relative performances of the US and its global peers is readily apparent when comparing the top and bottom 10 sector contributors to total returns. Far bigger losses in sectors within US Technology (software and hardware) and Consumer Discretionary (retailers and autos) accounted for the lion’s share of the difference between the two indexes.

Top and Bottom 10 contributions to returns — Full year 2022 (TR %)

Though the four US Technology and Discretionary sectors were laggards throughout most of the past year, their underperformance versus their global counterparts significantly deepened in the final quarter, particularly for US autos and retailers.

FTSE USA sector returns relative to the FTSE All-World ex USA sector returns (Rebased, TR, LC)

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