After a year dominated by geopolitical tensions, the energy crisis and inflationary pressures, what can we learn from 2022 and what are the main challenges facing economies in 2023? At the beginning of the new year, our experts took a look back over 2022 and presented their macroeconomic outlook for 2023.

In 2022, the markets were turbulent to say the least, as illustrated by the ups and downs of the equity indices. The global equity index (MSCI World in euros) experienced its third largest decline in the last 20 years, down 13%. We also saw a slump in the traditional safe havens of bonds as a result of the central banks’ monetary tightening.

No geographic regions were spared. Equity markets fell in the four main areas in which we invest: Europe, the United States, Japan and emerging markets. However, there were sharp divergences in performance within the emerging markets. Eastern European markets were heavily affected by the collapse of the Russian market. In contrast, Latin American markets performed well as these countries are mainly exporters of raw materials so they benefited from the increase in commodity prices. The Asian markets also had a difficult year in the wake of China’s underperformance, since the Chinese government’s zero-covid policy was a significant brake on economic activity.

Sector performances were very mixed. Utilities and energy fared well and managed to post positive performance for the year. But the communication, consumer discretionary and technology sectors suffered heavily. Healthcare and consumer staples also proved resilient.

What explains the sharp corrections in 2022?

The main factors that were beneficial in 2021 gradually deteriorated. High inflation, which has spread to many areas of the economy, a slowdown in activity and the central banks’ less accommodative monetary policies all had a strong impact on investor sentiment. The relatively tense geopolitical context also had a negative effect on the markets.

What’s the outlook for 2023?

The year has got off to a good start for European and emerging market equities, one of the reasons being the reopening of the Chinese economy. However, the US markets have enjoyed a less dynamic start to the year.

From a macroeconomic perspective, caution remains the watchword for 2023, as we are seeing inverted yield curves which are often synonymous with an economic slowdown or even recession. However, in recent weeks, many analysts have been revising the scale of the recession initially predicted for 2023: the fall in energy prices (gas and oil in particular) is good news in this respect, especially for the European economies. Regarding inflation, various factors suggest that the peak is probably behind us, even though we are unlikely to return to the very low level of the last ten years.

Life is not about waiting for the storm to pass, it's about learning how to dance in the rain.Seneca

What’s the best investment strategy?

This context reminds us that it is more important than ever to opt for an approach that favours quality assets and risk control.

Our experts apply a selection methodology that focuses on buying quality stocks at a fair price, because it is always the price paid that determines future returns. They follow a process that identifies companies with the potential for growth, not only in the short term but over longer periods, thanks to strong competitive advantages and the ability to set prices.

This environment also emphasises the value of three key rules:

• The imperative of having the discipline to stay invested. Many investors try to benefit from ‘market timing’, their aim being to sell at the peak and go back into the markets as they bottom out. However, this approach can be detrimental to your portfolio's performance. For example, between 2003 and 2022, annualised cumulative returns on the European market came to 6.1%. If an investor had exited this market and missed the best 10 days of performance, their return would have been only 2.6%. If they missed the best 30 days, their return would have been in negative territory. Yet, these 30 days represent less than 1% of the observed data.
• Focus on investing for the long term. Volatility is inherent in the markets, and every year the markets undergo corrections. However, it is possible to reduce volatility if you concentrate on investing for the long term. The longer your investment horizon, the lower your portfolio’s volatility.
• Correlation between risk and potential return. The level of a portfolio’s potential return increases with its risk. The search for a higher return necessarily requires assuming a higher level of risk.

The importance of making your wealth meaningful

Given our key role in the Luxembourg financial market, we are mindful of the notions of sustainability and responsibility. This responsible approach is naturally reflected in our investment solutions.

We take into consideration the importance that our clients attach to environmental, social and governance (ESG) criteria in order to offer investments that are best suited to their needs.

In an ever-changing world, we are convinced that if we factor in financial and non-financial risks, we will be able to offer relevant investment choices that will generate long-term returns.

It is all the more important to combine rigour (in the selection of companies in which to invest) and strict risk management.

Your adviser is always available to discuss your projects with you and provide information on your investments.