The biggest stock market surprises of 2022 for fund investors

From niche markets performing well to inflation ‘hedges’ disappointing, this is what surprised in 2022.

Predicting stock market winners and losers, even if you knew the big events that would shape markets ahead of time, is always a humbling experience.

While energy stocks performed well and unprofitable tech stocks did poorly, which are relatively predictable consequences of geopolitical conflict and rising interest rates, there were investment outcomes that would have caught many by surprise this year.

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These include niche emerging markets topping the performance charts, inflation-linked bonds performing poorly and America’s giant technology stocks finally faltering.

We look into some the biggest surprises this year and the lessons to take away.

Niche markets beat ‘core’ markets

Turkey was the best place to be invested in 2022: exchange-traded funds (ETFs) tracking the market, such as the iShares MSCI Turkey UCITS ETF and HSBC MSCI Turkey, doubled in value. Other niche emerging markets performing well were Thailand, which rose about 11%, and Brazil, which rose about 17% (all in sterling terms).

The reason for Turkey’s strong stock market performance was not a strong economy, but actually a weak one.

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Falling interest rates and retail investors rushing into stocks to help offset the corrosive effects of inflation on their bank balances were the drivers of the strong performance this year of Turkish shares (150% return in local currency and 116% in sterling).

Bloomberg reports that the number of equity trading accounts opened by retail investors in the country rose by 32% to 3.1 million, and foreign investors turned less bearish and picked up cheap stocks.

Brazilian shares performed well as investors bid up commodity prices. Its stock market is dominated by mining and oil companies, such as Vale and Petroleo (NYSE:PBR), where profit margins increase when commodity prices rise.

Thailand shares are also concentrated in commodity-related sectors, with energy (14%) and materials (11%) two of the biggest market areas.

The lesson for investors is that diversification is very important, including across different emerging markets. Owning a large pool of stocks means owning the biggest winners (and losers), and given that stock markets tend to rise over the long term, this is an effective investment strategy.

While this year’s best markets are unlikely to be next year’s, keeping a diversified portfolio means that hopefully an investor will own the winners regardless of who they are.

Bonds bottom of the charts

One of the worst places to be in invested this year has been inflation-linked bonds. The iShares Index Linked Gilt Index and Vanguard UK Inflation-Linked Gilt Index are down around 30%. Longer maturity bonds also suffered, with the iShares Over 15 Years Gilts Index falling 38%.

While index-linked bonds give investors income protection with the inflation rate, providing a stable and predictable return, the price of the bonds can swing dramatically before they mature.

With inflation increasing this year, central banks have raised interest rates. This is bad news for the prices of bonds as investors are no longer getting the best rate and inflation erodes the value of returns. They sell bonds, causing prices to fall and yields to rise.

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This means that investors have been dumping inflation-linked gilts, even though inflation is rising. The prospect of rising interest rates has far outweighed the benefits of an inflation-linked income.

But in a year when bonds crashed, one part of the bond market actually performed relatively well: floating rate bonds and short duration bonds. The iShares $ Floating Rate Bond UCITS ETF rose and the iShares $ Ultrashort Bond UCITS ETF both rose 12%. This is partly due to exchange rates, with the pound falling against the dollar, making dollar payments more valuable, but also due to the resilience of these sectors when interest rates rise.

Bonds set to mature soon are less affected by rising interest rates than longer maturities as they are about to return their principal, rather than locking investors into lower interest rates for long periods. Floating rate bonds increase their income payments when rates increase, therefore providing a natural hedge against rate rises.

The lesson for bond investors is that changing interest rates play a huge role in performance, and over short periods their impact on bond prices can be more important than the yield on bonds, particularly when starting yields are low. The good news is that now, following the sell-off, yields are higher.

Big technology firms are not invincible

It took until April this year for America’s technology giants to finally falter, but 2022 was the year that big tech finally lost its shine.

This year, Apple shares have fallen 27%, Microsoft shares 28%, Google shares 38%, Amazon shares 50%, and Facebook (Meta) shares 65%.

Aside from Amazon, which relies on its cloud computing arm for most of its profits, all the other firms are money-printing machines, once viewed as protected against swings in the economy. 

That narrative collapsed this year, with price-to-earnings (p/e) multiples for some of these companies, which measures how much investors pay for earnings, falling below those for more defensive consumer staples stocks.

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For example, Morningstar data shows that Apple, Microsoft and Alphabet have p/e multiples of 21.5, 26 and 18 compared with Diageo and Procter & Gamble’s 26.

Investors are concerned about a digital advertising slowdown at Google and Meta, and flagging demand for Apple’s expensive smartphones if there is a deep recession. Higher interest rates also increase options for investors, who can now get about 4% annual returns from lending to safe governments, such as the US or UK.

The takeaway for investors is that no sector is invincible and rapid growth cannot last forever. However, with valuations now more in line with stock market indices, and plenty of growth opportunities ahead for technology firms, it is too early to write off America’s tech giants completely.