Global equity markets were particularly volatile during Q4 2022, driven by uncertainty surrounding the persistence of inflation and the pace of interest rate hikes. In October and November, there was a strong rally in equity markets as expectations around the size of the next US Federal Reserve interest rate hike softened. Optimism that the US had arrived at peak inflation spurred global markets on, only to be undermined by strong labour market data in December. These changing expectations were also seen in the foreign exchange market, with US dollar strength abating, bucking the trend seen in the first three quarters of the year.

The easing of Covid lockdown rules in China pushed Asian stocks higher through the quarter (with the MSCI Asia Pacific ex Japan Index up more than 18% in November) - only for a material jump in Covid cases to temper enthusiasm in December, resulting in many analysts reassessing the ease with which supply chains will "normalise".

Corporate earnings reported at the beginning of Q4 (covering the companies’ Q3 results) exhibited material dispersion, with big tech disappointing but the tangible economy surprising to the upside. Better than expected corporate profitability helped allay recessionary fears at the beginning of the fourth quarter, but concerns escalated towards the end of the quarter.

The uncertain market outlook is captured through our market environment analysis which, measures sentiment and risk within financial markets. This analysis was showing a high-risk environment with pessimistic market sentiment throughout the quarter, as it has done for the calendar year. Fund positioning remained cautious even through the bear market rally observed in October and November. This resulted in the fund being overweight to faster moving components like reversals within market dynamics, as well as expressing a preference for strong company management, which is easier to distinguish in challenging market environments.

Being positioned for uncertainty aided the fund through the quarter, as company management helped to drive the benchmark relative performance of the fund. Stock selection in the IT and financial sectors was particularly fruitful this quarter, with energy and consumer staples stock selection weighing on performance. Our sentiment criterion negatively contributed to benchmark relative performance through the quarter, but was still one of the largest contributors to relative outperformance through the calendar year.

Elevated risk and depressed market sentiment have persisted through much of 2022 and we expect them to continue into 2023. While at first glance this may paint a depressing picture for aggregate equity market returns into 2023, there are reasons to be optimistic. Not least, negative sentiment has set expectations low, increasing the potential for upward revisions. As was the case in Q4 2022, we suspect prices will be particularly sensitive to the announcement of corporate profits in early 2023, with volatile price action (positive and negative) being the most likely outcome.

Our shorter horizon, faster moving signals typically benefit from more volatile environments, with a renewed focus on delivery of fundamental operating performance being encouraging for our slower moving factors. We expect dispersion between stock price returns to remain wide, drawing a clear distinction between the winners and the losers in 2023.