Market performance in 2023: better times ahead

Date: 23 Jan 2023

Vicente Bunn

Rupert Thompson, Chief Economist at Kingswood, gave his analyses of market reactions to recent events and identifies upcoming market trends.

Rupert Thompson, Chief Economist at Kingswood, shares his view of the reaction of the market. Below his comments.

2022 was an unprecedented year for markets, with both bonds and equities recording substantial losses at the same time. UK government bonds ended the year down close to 25%, a disastrous performance for a supposedly low risk asset.

Meanwhile, global equities lost some 15%, although the pain for UK investors was considerably less. A sizeable fall in the pound, particularly against the dollar, meant the decline in sterling terms was reduced. Furthermore, despite the dire domestic economic news, UK stocks were the best performing major market last year.

The number one cause of the market turmoil was the surge in inflation to multi-decade highs. This prompted central banks to raise interest rates aggressively, fuelling expectations of a slide into recession. This year, inflation should once again be the key factor determining the market outlook.

Interest rates look certain to be raised further over coming months, most likely peaking in the spring at around 5% in the US, 4-4.5% in the UK and 3-3.5% in the Eurozone. If as we expect, inflation falls back considerably but remains significantly above target over the coming year, central bankers will be in no hurry to start easing policy and rate cuts may well have to wait until 2024.

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