Periodic Table of index returns
2022: a year to forget and a year to remember
Financial markets were challenged in 2022; most notably by the war in the Ukraine, the aftermath of the pandemic, rising inflation and central banks hiking interest rates. 2022 was an unusual year, where both equity and bond markets sold off at the same time. Nevertheless, we believe this was a healthy correction and that rising interest rates play a role in preventing inflation. Witnessing the “red ink” generated by most asset classes in 2022, it can be easy to forget how well investors may fare over longer periods.
The volatile nature of financial markets can be highlighted by Mercer’s Periodic Table (‘our Table’) of index returns. Produced annually, it colour-codes 17 major asset classes and ranks how each performed, on an annual basis, over the last 10 years. Attached is an interactive version and printable version of our Table for the 2022 calendar year.
Taking a glance at the Table, with its scattered palette, highlights how difficult it is to unearth patterns or at least patterns that could be of use going forward. Last year’s stars may prove to be a winner again the next year or may sink to occupy lower ranks. If only investing were easy!
Demystifying the Periodic Table
Looking across 2022 and the past decade, the following observations can be made from our Table:
- Fifteen of the 17 asset classes generated a negative return last year, compared to only four asset classes in 2021, showing the breadth of financial market correction in 2022.
- Leading the positive returns in 2022 was Australian Direct Property, with a stellar positive return of 10.7%, reflecting that investors sought out alternative inflation linked sources of return.
- Cash featured in second place in 2022, with a positive return of 1.3%, as confidence in risky assets declined with the tightening of monetary policy.
- Australian equity declined 2.7%, which was relatively moderate compared to other asset classes, as Australia benefitted from elevated commodity prices and the eventual re-opening of China in November 2022. Australian Small Caps on the other hand, down 18.4%, underperformed the broader index.
- International Equity (H) declined 18.1%, with a re-pricing of (especially) US and Growth style equities; as did Global Listed Property (H), down 23.5%, in anticipation of the impact of rising interest rates.
The interactive table, with its scattered palette, quickly highlights how problematic it is to unearth patterns; or at least patterns that could be of use to us going forward. Last year’s stars sometimes prove to be a winner again the next year, but at other times sink to occupy the lower ranks. If only investing were easy!
Key takeaways for investors
Looking at 2022, funds with a growth orientation, particularly those focusing on offshore asset classes, generally underperformed. Meanwhile, funds with a conservative and/or domestic orientation produced less negative returns. However, our Table also helps in reminding us that investment markets are inherently volatile and that we can never predict with a high degree of confidence what the future will hold over the short to medium-term. Therefore, for most individuals, the power of investing may well be harnessed through securing asset class diversification, taking on the risk they can tolerate and adopting a longer-term perspective. As the old adage goes, “Diversification is the only free lunch in investing”.
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