Global and local equity and bond market

The beginning of the 2022 year started rather calmly. Equity markets continued the growth which started in 2021 following the recovery of the global economy after the COVID-19 pandemic. All that changed on February 24, 2022 – the day that Russia attacked Ukraine. It brought about a series of negative political and economic consequences on a global scale, in particular contributing to a faster growth of inflation. Consequently, central banks commenced aggressive antiinflation measures, thus kicking off a series of interest rate rises, which only worsened fears that economy was slowing down and recession was returning. Outflow of capital was noticeable both in equity and bond markets.

The American Central Bank (FED), which for over two years maintained interest rates at around zero, raised them to 4.5% in 2022, at a pace that was much faster than in the case of any previous cycle of tightening the monetary policy. Similar steps were taken by most global central banks.

It was clearly visible that the global sentiment for equity markets worsened in all global equity indices. The MSCI ACWI – All Country World Index (in terms of price), which groups large and mid-cap companies from developed and emerging markets, dropped in 2022 by almost 20% y/y, thus cancelling the 17 p.p. increase generated in 2021. At the same time, it was the worst result generated by this index since the 2008 global financial crisis.

The worsened sentiment for equity markets was noticeable throughout most of 2022. It was not until Q4 that the sentiment improved, albeit not enough to affect the poor result of market indices at the end of 2022.

In 2022, Polish indices followed global decreases brought about by growing inflation, tightening of monetary policy and fears of the oncoming economic slowdown. The geographical proximity of the Russo-Ukrainian war also negatively impacted valuation of shares (through increased risk premiums) in local markets. In the several months after the war had broken out, WIG lost 17% y/y. Since the beginning of the year until Q3 2022, the cumulative loss generated by this index amounted to 35%.

Some of these drops were repaired in Q4 2022. At the end of 2022, WIG recorded a loss of 17.1% y/y, thus losing most of the growth generated in 2021.

Throughout most of 2022, MSCI EM remained in a downward trend, marking another declining year. Some relief came in Q4 2022, probably thanks to signals of the nearby end of interest rate rises and consequently weaker dollar, positively impacting emerging market assets.

Still in 2021, the main Polish index WIG20 did not go in the same direction as the emerging market index, even though historically, they were highly correlated. Contrary to MSCI EM recording losses, the Polish WIG20 index rose by 14.3% y/y in 2021. In 2022, WIG20 once again came close to MSCI EM, both in terms of direction and depth of falls. At the end of 2022, MSCI EM decreased by 21.8% y/y

In 2022, the sovereign bond debt market did present an alternative stable source of income for investors. Similarly to shares, bonds were losing value throughout the year. Consequently, on an annual basis yields (price drops) were mostly connected with dynamically growing inflation which was increasing interest rates. In Poland, the reference rate determined by the NBP was increased from 2.25% to 6.75%.

Dynamic interest rate increases carried out in a high-inflation environment, caused a large decline in prices (increase in profitability) of Polish sovereign bonds on the yield curve. Throughout the year, the yields on 1-year bonds increased from 3.4% to 6.5%, 2-year from 3.4 to 6.7%, 5-year from 4.0% to 6.9%, and 10-year from 3.7% to 6.8%.

Yield curves in most markets, moved sharply upward, driven by strong increases in inflation, inflation expectations and significant increases in interest rates and announcements of their continuation by the major central banks. As a result, the annual yields of 10-year US sovereign bonds, influenced by rising inflation expectations, increased from 1.5% to 3.8% and of German bonds from -0.2% to +2.6%. See more Situation on the financial markets

Source: https://www.nbp.pl/