Q3 2022 Review: Volatility Persists

Key Takeaways

The third quarter of 2022 was quite the rollercoaster ride for equities, as a strong bear market rally in July proved unsustainable and was completely undone over the following two months. The July rally was the result of increased optimism that a soft landing was on the cards, as the path of interest rate hikes could be somewhat gradual. However, the tone of central banks quickly extinguished this optimism as they are reiterating that their priority is to tackle inflation, even if at the expense of economic growth. In line with this narrative, during the quarter, a substantial number of central banks around the world implemented rate increases.

Over the period, the US Fed raised rates by 1.5%, while rate hikes by the European Central Bank totalled 1.25%. Global Inflationary pressures eased over the quarter, led by a drop in food prices, and a 30% drop in oil prices. However, core inflation remained elevated, suggesting that further aggressive monetary policy tightening is required. In August, the Global Composite Purchasing Managers’ Index moved to below 50 for the first time since June 2020, indicating that global growth is slowing down.

United States

Economic data, particularly job data issued in the United States (US), pointed towards a resilient economy, despite the fact that negative growth was recorded in each of the first two quarters of the year. US Inflation was relatively flat in August as Consumer Price Index showed an 8.2% annual inflation rate, just 0.1% higher than the previous month. This modest increase was predominantly down to a 10.5% decline in gasoline prices. The US housing market seems to continue on a downward trend. Although some parallelisms are being made with the 2008 housing crisis, the structure seems much more solid with a larger percentage of fixed rate mortgages, as opposed to variable, and a lower portion of sub-prime mortgages than 2008.

US equities fell in Q3. The communication services sector, including both telecoms and media stocks, was among the weakest sectors over the quarter, along with real estate. The consumer discretionary and energy sectors proved to be the most resilient.


Europe’s main concern was once again the energy crisis, caused by Russia stopping gas flows through Nord Stream 1 completely. Nevertheless, gas prices were actually down, as increased LNG imports have helped the EU achieve its target of filling 85% of its underground gas storage capacity. The European Commission remains determined on tackling the situation through electricity savings, a cap on energy prices, and a tax on revenues of fossil fuel procedures. Newly issued economic data such as Composite Purchases Managers Index continued to indicate an economic slowdown, further increasing the probability of a recession. Eurozone Inflation meanwhile reached 9.1% in August and was on the way to exceed 10% in September. In view of this, the European Central Bank implemented a 0.75% rate hike in September, with further hikes expected in October and December.

Eurozone shares experienced further sharp falls in Q3 amid the ongoing energy crisis, rising inflation and consequent fears about the outlook for economic growth. Every sector posted negative returns, with the steepest falls for communication services, real estate and healthcare.

GDP figures showed the eurozone economy grew by 0.7% quarter-on-quarter in Q2. However,foward-looking indicators signalled a weakening economy. The flash composite purchasing manager’ index (PMI) for September came in at 48.2, representing a third consecutive month below 50.

United Kingdom

In the United Kingdom (UK), economic data continues to indicate a loss of momentum in the economy, as consumer confidence fell to an all-time low in September. Jobs data however is still strong, as the unemployment rate fell to 3.6% in July, a decades-long record. CPI figures were slightly lower in August at 9.9%, from 10.1% but core CPI still increased by 0.1% to 6.3%. In trying to combat this situation, the Bank of England had announced two 0.5% rate hikes.

The new administration led by Liz Truss seems to have kicked off on the wrong foot, as a generous fiscal package put pressure on government finances in a time where government borrowing is becoming more expensive. In fact, the Sterling fell while Gilt yields increased, so much so that the Bank of England had to intervene by purchasing long-dated bonds. This sent the Sterling to an all-time low versus the US dollar.

Sterling weakness had already been a feature of the quarter, especially after the US Fed warned it would ‘keep at it’ in relation to raising interest rates. After expectations in July that the peak in US rates might be close, this moved the market’s focus back towards near the term cash flows, such as those offered by the UK’s large cap constituents.

Emerging markets

In China, the central bank remains one of the few exceptions with an easing, rather than tightening, policy as official data shows that inflation is under control. The economy however is still experiencing some issues, through housing market weakness, weather disruptions, and further Covid outbreaks.

Poland was the weakest index market, with Hungary and Czech Republic also among the biggest decliners, as the Russian war in Ukraine escalated and led to an energy crisis in Europe, which in turn has contributed to accelerating inflation.

Turkey was the best performing market. Despite inflation that is over 80%, the central bank cut interest rates twice during the quarter and the economy continues to grow strongly. India and Indonesia also posted positive returns which were ahead of the broader index. Brazil performed well as investors took comfort from a narrowing in opinion polls ahead of October’s presidential election, and as growth and inflation improved. Data showed the economy growing strongly in the second quarter while the CPI inflation rate has been easing for two consecutive months.

Fixed Income

The heightened market volatility during the third quarter continued as central banks and investors continued to grapple with persistent inflation amid a slowing growth backdrop. From a month-to-date perspective, credit spreads in the US widened as the sell-off in High Yield bonds was at a larger magnitude than Investment Grade as well as Government Bonds across the curve. In Europe, credit spreads of investment grade over sovereign widened, while the highest rated bonds in the High Yield space moved more in line with the sovereign curve.

The Federal reserve (Fed) tagged on another 75 bps increase onto existing rates in September which brought the rate to between 3.0% and 3.25%.This is the fifth interest rate in the year so far, following rate hikes to 1.75% in June and 2.5% in July. Chair Jerome Powell stated that the Fed’s outlook remains unchanged since the Jackson Hole meeting. The US 10- year yield rose from 2.97% to 3.83% and the 2-year yield from 2.93% to 4.23% in Q3.

Across global credit, returns were poor as the market drawdown continued. Sterling investment grade and high yield were the worst performers. European investment grade and high yield, as well as emerging markets credit, fared better but only on a relative basis, as total return remained negative. Investment grade bonds are the highest quality bonds as determined by a credit rating agency; high yield bonds are more speculative, with a credit rating below investment grade.

Local Market

The MSE Equity Index saw a slight decline of 0.4%, ending the third quarter at 7,688.267 points. The negative performance was the outcome of 16 negative movers, mainly led by RS2 Software plc (-12.1%), Bank of Valletta plc (-3.2%) and GO plc (-5.2%). On the other hand, 12 equities headed north during the period. The best performers were International Hotel Investments plc (+13.7%), Simonds Farsons Cisk plc (+10.4%) and FIMBank plc (+4.8%).

The MSE Corporate Bonds Total Return Index erased the previous month’s decline, gaining 1% to close at 1,155.783 points. The MSE Malta Government Stock Index declined further by -1.5% to close at 917.604 points.


Article Sources: Schroders Insights and Malta Stock Exchange

This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]