To The Moon

By Tiger Trade Asset Management Research team

The scenes of winning the 2022 Winter Olympics are still vivid, and the jubilation of the FIFA World Cup finals is still lingering. Although 2022 has been a good year for sports the stock markets have taken a hit due to various factors including pandemic control, inflation, interest rate hikes andwar.

Looking forward to 2023, pandemic control on the east coast of the ocean has been optimised, the inflation on the west coast of the ocean has passed itspeak, and the cold winter in Eurasia is fading away.

However, with all the changes that 2022 brought about economically, what will 2023 look like for investors? To get a better understanding let's look back at how the major assets performed in 2022.

1. Performance of Major Assets

In order to assistinvestors in observing and comparing asset returns in different countries and regions, we summarised the returns of stocks, bonds, commodities, real estate, currencies and alternative investments in 53 countries and regions around the world, totalling 287 asset targets in six major categories. It is important to note that the compiling of this information on theincome and returns data is denominated in US dollars.

-Global stocks: 123 kinds of stock assets, more than 80% of which recorded a decline in 2022, with an average decline of 11.43%. Among them, Energy-related equities were leaders while Chinese ADRs lagged.

-Global bonds: Among51 kinds of bond assets, only the US short-term treasury bonds ended slightly positive, while the rest all ended lower. The average decline was - 15.72%; among them, the decline in long-term government bonds of developed countries was the largest.

-Commodities: 29 kinds of commodities showed strong overall performance. More than 70% hadan increase and the average return reached 11.13%. Among them, natural gas, crude oil and other assets rose the most, while copper, cotton, coffee and other assets fell the most.

-Global real estate: 27 kinds of real estate assets are all negative, without exception! The average decline was as high as 24.84%, of which the European real estate tumbled with real estate in Sweden and Germany fallingby more than 50%.

-Global currencies: Most of the 39 currencies fell this year, mainly due to the appreciation of the US dollar. Among them, Bitcoin suffered Waterloo with a decline of 63.86% this year.

-Alternative investment: among the 17 alternative assets, managed futures and global macro strategies rose by more than 20%, and AIEQ AI funds fell by 25%.

Data from Bloomberg

Data from Bloomberg

2 Theme I in 2022: inflation remains high and the Fed tightens more than expected

Let's move back to the beginning of 2022. Even the most hawkish researchers would not have predicted that the Federal Reserve will raise interest rates by 425 bps throughout the year.

However, most people have been taking the low interest rate and low inflation environment over the past decade for granted.

From September 2008 to September 2022, The Fed's PCE inflation YOY is above the 2% inflation target for only about 30% of the time, and the high readings are all in 2022. The US 2-yearreal interest rate is only positive for about 30% of the time, and the benchmark interest rate of the Federal Reserve is no more than 2.5% before this year.

Researchers and market participants who entered the industry in the past decade, due to their instinctivepath dependence, cannot even imagine such a huge magnitude of Fed rate hikes. That's why the market has been underpriced Fed hikes over and over again.

Data from Bloomberg

Although many rounds of huge fiscal stimulus have sown the seeds of inflation since the pandemic; although the PCE Index had already risen to more than 4.5% at the end of last year, far exceeding 2%; although Fed Chairman Powell officially overturned "inflation is temporary" in the congressional hearing at the end of November; although the short-term real interest rate (the blue line below) of the USA at the beginning of December last year was too negative to sustain.

Data from Bloomberg

As a result, the US short-term interest rate rose sharply, resulting in the worst performance of the overall US debt market in more than 20 years. The US stock experienced a large valuation shrinkage. When the earnings expectation of the $S&P 500(.SPX)$ rose slightly, the price decline was all due to the negative contribution of valuation.

US Treasuries and Investment Grade Bonds recorded their worst annual performance since 1999，Data source: Bloomberg

Data Source: Bloomberg

Data Source: Bloomberg

The more-than-expected Fed tightening under high inflation is the first major investment theme in 2022. Under this theme, the US dollar became one of the biggest winners among major global assets, due to the relatively stronger US economy compared to the rest of theworld, and the Fed has more room to fight inflation by tightening its momentary policy.

3.Theme II: continuous global disputes and the beginning of deglobalisation

Another theme running through 2022 is deglobalization. Competetions between US and China, Russian invation of Ukraine, Taiwan Strait crisis, financial sanctions, resource blockade, geo war... The "global village" that has lastedfor decades seems to have collapsed overnight.

The double blows of economic recession and the pandemic impact tore up the truth of the world, exposed the differences between the rich and the poor, stimulated the rise of protectionism, and accelerated the process of deglobalisation.

Wealth problem: the gap between rich and poor, uneven distribution. In the process of globalisation for nearly half a century, developed countries have transferred low-end manufacturing to developing countries in order to reduce their own costs. To a certain extent, it has stimulated the economic employment of developing countries and improved global production efficiency, but it has also led to the continuous reduction of the domestic employment population in the long run.

On this basis, due to trade logistics, coastal areas have more business opportunities than the mainland. Moreover, in the general environment of long-term low-interest rates, countries with assets can benefit from the rise in asset prices and gain cheap leverage, which ultimately leads to the widening gap between the rich and poor. The resulting social contradictions have promoted the rise of unilateral protectionism represented by the United States.

Source: World Inequality Database

Competition issues: intensified conflicts and unilateral protection. Unilateralism and protectionism are gradually rising, which challenges the general framework of a global division of labour and free trade. On the one hand, due to the change in China's income structure, the demographic dividend has declined, affecting the supply of cheap goods; On the other hand, the pattern of "one superpower and more powerful" is gradually evolving to "two powers standing side by side". China is gradually marching towards high-value-added industries, which has triggered a strong counter-reaction in the field of trade and science and technology from US.

On top of this, geopolitical disputes have become increasingly fierce. It can also be seen from the US military expenditure of the "five permanent members" that the overall military expenditure has been in a downward trend for nearly half a century, but since 2018, the military expenditure of major countries has increased significantly. The conflict between Russia and Ukraine is the product of increasingly fierce geopolitical disputes.

Data from World Bank

Globalisation: global barriers, regional enhancement. With the increasing proportion of geopolitical factors in the consideration of political and economic decisions of major countries, in recent years, major events with the colourof deglobalisation have emerged one after another: such as the Brexit in 2016, the Sino-US trade dispute in 2018, and the "large-scale withdrawal" of the United States in 2019.

At the same time, major sovereign countries and economies, on the other hand, are strengthening their regional links, and regional organisations such as ECEP, TPP, CPTPP, etc. are flourishing, The share of its internal transactions in global trade has been increasing year by year.

After the outbreak of COVID-19, some western countries advocated "industrial chain backflow", further strengthening the trend of deglobalisation. The outbreak of the Russian-Ukrainian conflict has led to the reshaping of the global energy order, which may also lead to the segmentation of the global energy market and the economic and financial decoupling between regional organisations in the future.

Source: businessdaily.com

In the context of deglobalisation, security has replaced the division of labour, and protection has replaced cooperation. From food and energy in the upstream to manufacturing and production in the midstream to consumer services in the downstream, self-sufficiency and self-reliance are emphasized. Confronting each other, catching up with each other, and fighting fiercely is not only the main line of investment in 2022, but also the main theme of the medium and long term in the next 5-10 years.

4 Structural market opportunity is everywhere

The monetary policy of most of the world's central banks led by the Federal Reserve tightened beyond expectations, and the conflict between Russia and Ukraine opened the prelude to deglobalisation, which had a huge impact on the pricing of various types of assets. However, if we dig carefully, we can still find many opportunities to make money in 2023.

The first isthe US value stocks. Although the monetary tightening policy has a great impact on the stock valuation, the growth stocks whose valuation has been greatly expanded in the easing stage bear the brunt, and they have more room to "squeeze water" when the tightening comes. The valuation foam of value stocks is relatively small, so we can see from the P/E ratio that the decline in valuation is far less than that of growth stocks.

In addition, in the context of reopening after the epidemic, the economy has ushered in a wave of high momentum, and corporate profit margins have remained at a high level, driving corporate profits and prices of value stocks to improve. After an extreme tightening wave, the S&P 500 pure value index still recorded a positive return of 4.88% from the beginning of the year to November.

Source: Bloomberg

Source: Bloomberg

Secondly, in addition to the value style, the stock markets of some countries have also gone out of a good bull market.

Stock index performance of some countries (data in 2022 up to 2022/11/30) ,data from Bloomberg

Turkish stock rose the most. Although the country ushered in heady inflation this year, the CPI in October reached a staggering 85.51% year on year, and its currency lira depreciated by 28.53% against the US dollar from the beginning of the year to November. Generally speaking, currency depreciation will lead to capital flight, which will put pressure on the stock market.

However, the situation in Turkish is a little different. The interest rate of its own one-year government bonds has not kept pace with inflation, reaching 27.16% this year, which is only 9.08% at present. After inflation is included, the real interest rate has been negative, which causes Turkish domestic funds to flow to equity investment with non-fixed income and less sensitive to inflation shocks in order to fight against inflation. A large number of local investors poured into the stock market, which was much larger than the reduction of foreign capital, driving the stock market up. Therefore, even after considering the exchange rate, the stock market of Turkish dollar terms still surged 97.19%, becoming the leader of the equity market this year.

Source: Bloomberg

Neutral countries rich in resources will generally become the big winners in 2022. The conflict between Russia and Ukraine caused countries to "stand in line", and neutral countries had fewer trade restrictions, which could even increase exports. At the same time, after the epidemic, global inflation has raised commodity prices, and resource-neutral countries have earned a lot under the double buffs. Energy exporters in the Middle East, such as the United Arab Emirates and Lebanon, benefited directly from the soaring energy prices, and the stock market performance was very strong. Argentina, Chile, and Brazil, which are neutral resource countries located in South America, also saw significant growth.

Finally, from the perspective of major assets, although inflation suppresses the valuation of various major assets from the perspective of financial pricing logic, commodities actually benefit directly, and energy commodities are the ones with the largest increase. In 2022, when the stock markets of China and the United States both fell, the energy sector in the stock markets of the two countries continued its strong performance in 2021.

Performance of energy-related targets (data in 2022 up to 2022/11/30),Data from:Bloomberg

$iPath Series B Bloomberg Coffee Subindex Total Return ETN(JO)$ $United States Natural Gas Fund LP(UNG)$ $iPath Series B Bloomberg Cotton Subindex Total Return ETN(BAL)$ $United States Oil Fund(USO)$ $Invesco DB Commodity Index Tracking Fund(DBC)$ ，$ELEMENTS Linked to the Rogers International Commodity Index - Total Return(RJI)$ ,$iShares S&P GSCI Commodity Indexed Trust(GSG)$ ,$United States Commodity Index Fund(USCI)$ ,$Wheat - main 2303(ZWmain)$ $Teucrium Wheat Fund(WEAT)$ $iPath Bloomberg Commodity Index Total Return ETN(DJP)$

Expect Panning the Gold Part II| Evolution of Investment Theme in 2023 for next post.