English Markets

The end of free money (4th quarter 2022)

Although equity markets have had worse episodes, rarely have things been so catastrophic in so many asset classes than 2022.

For the last update of the year, we look back at the end of free money and its impact on the markets in 2022 (according to The Economist magazine) and a possible positioning approach (see DBS in the source).

End of free money and impact on markets in 2022

Although equity markets have had worse episodes than 2022, rarely have things been so catastrophic in so many asset markets at once following the interest rate hike by the US Federal Reserve, followed by most of the world’s central banks:

  • The flagship U.S. major index (S&P 500) was down nearly a quarter at its lowest point of the year.
  • Government bonds, which are typically a hedge against equities, suffered badly.
  • Treasuries are having their worst year since 1949 according to The Economist.
  • Bitcoin collapsed.
  • Gold was not a refuge.
  • Home prices are falling in many areas.

Only commodities had a good year, largely because of war, not interest rates. Before considering this path, it is worth remembering the risks of volatility, currently high entry prices, no interest or dividend, and the difficulty for private investors to make a go of commmodities.

Investing in an era of higher interest rates and scarcer capital

Investors find themselves in a new world, with new rules. However, the end of free money had to end sometime, even if for some the pain has been and will remain intense. But we must realize that this parenthesis of free money was the anomaly, not the new period that is offered to us today.

This year’s capital losses offer hope for a return to capital appreciation (bonds and bank accounts in particular) and higher future real returns.  Of course, asset prices that have fallen significantly can still fall further, but valuations considering various factors seem more reasonable than they were even a year ago. Thus, as Warren Buffett has indicated in the past, potential long-term investors should welcome falling prices and avoid selling at the bottom.

Index investing is an inexpensive way for many investors to earn the average market return. This new regime of higher interest rates does not call into question a long-term vision of investing through passive investments based on attractive currency entry points (see below) and regional markets, with regular and progressive investments.

Undervalued currency entry points

When considering passive equity investments in attractively priced regions, a key element is undervalued currencies at the time of investment.

Considering undervalued currencies DBS Bank recommends long positions in JPY, GBP, CAD, and short positions in USD, CHF, EUR.

The USD, NZD and CHF remain the three most overvalued currencies in November 2022 and the significant undervaluation of the GBP and JPY now offer interesting opportunities.

In Asia ex-Japan, MYR, CNY, IDR, and KRW are undervalued, while PHP, THB and INR are overvalued.

For non-Japan Asian currencies, the MYR is now at a record high valuation level, being more than 20% cheaper than its fair value. The CNY has replaced the IDR as the second most undervalued currency in non-Japan Asia. Concerns over China’s zero growth policy and the resulting risks of disruption continue to weigh on sentiment.

The new rules, The Economist, 10.12.2022
DEER recommendations, November 2022, DBS