In the US, the US Federal Reserve (Fed) has slowed down its tightening pace, which was anticipated; but the much-hoped-for “pivot” is nowhere near, with recession worries still rife. 2022 was a particularly bruising year, marked by the Russia-Ukraine conflict, increased geopolitical tensions, and rapidly rising inflation and interest rates globally.

The MSCI World Index was up by 9.8% in the fourth quarter and down 18.1% for the year in US dollar terms. Over the same periods, the S&P 500 gained 7.6% and shed 18.1% respectively. At the regional level, developed market equities and emerging market equities were equal, both returning around 9.8% in US dollar terms for the quarter.

The positive quarter was driven hard by the Energy and Materials sectors, with Energy stocks yielding record returns in 2022. The Consumer Discretionary and Communication Services sectors were hit hardest as markets were still cautious, continuing to price in recession risk, amid bond yields rising. Quality stocks held up very well and put in a strong performance in the last quarter of the year, while growth stocks continued to struggle. Value stocks also enjoyed a particular strong end to the year, as investors continue to seek out a safety net in "lower priced" companies for now.

The main economic driver for the year was by far the stickier-than-expected inflation, and its impact on monetary policy, with monetary tightening being the result. Last year saw aggressive tightening by most central banks across the world, and while the hiking cycles might not be over just yet, it does seem as though they have slowed. Global activity data was generally weak for the year. Leading indicators in the manufacturing sector trickled lower throughout most of the world, housing weakened, and consumer confidence also showed negative sentiment, despite consumer spending remaining at fairly solid levels. Politically, the focus was on Russia’s invasion of Ukraine and the effect on inflation, particularly relating to energy.

Against this challenging backdrop, the Old Mutual Global Islamic Equity Fund outperformed its benchmark by around 4.6% for both the quarter and the year to date.

Companies with attractive free cash flow yields, pricing power and healthy balance sheets have historically performed better through economic slowdowns and recessions. Pricing power helps companies maintain margins in inflationary times while fortress balance sheets and low debt levels offer protection from a rising interest rate cycle and allow astute company management to invest counter cyclically when valuations are depressed.

Managing portfolio volatility while being invested in high-quality businesses with stable business values trading at attractive prices can help alleviate volatility in a downturn. Diversification is also important, with many investors underweight emerging markets, where valuations are attractive - particularly in China, which may be poised for recovery given its loosening monetary policy and fiscal stimulus. China is looking attractive given the positive catalysts of finally re-opening, policy easing and simmering down of regulation. The portfolio has direct China exposure of approximately 4.0%, balancing the return opportunity versus the potential regulatory risk.

The good news is that investors should remember that nothing lasts forever, including downturns. As an asset class, equities remain a key source of long-term returns, diversification and inflation hedging, even in economically challenging periods with elevated market volatility. Following recent market falls, current valuations point to improved future expected returns, and this was evident in global markets towards the latter end of 2022. We are confident that the portfolio is well positioned to navigate market uncertainty and to create long-term wealth for our clients.