We have arrived at our final article of 2022, and, as usual, we thought it would be interesting to revisit our predictions for the past year and come up with a few more heading into 2023.

First, in terms of our predictions for 2022, we admit like many in the market this year, our track record here could have been better. But as with many things in life, it pays to reflect.

We got this completely wrong (but lets see how long rates can be maintained at these levels). We find surprising the relatively benign economic landscape for emerging markets, given the implications for the dollar index. That is, global growth has been relatively resilient, especially compared to similar periods, with GDP growth still on track to print 2.7% for 22′.Score: 0/1

This one depends on how you look at it. When putting this forward, our thesis was related to our first prediction on central bank policy. That is, negative real yields will effectively mean that equities as an asset class would continue to remain attractive in relation to fixed income and cash. We were correct on the point of negative real yields, but we did go wrong: the rise in CPI and the aggressiveness of central bank policy would create an environment with minimal cover. Cash was perhaps the best-performing asset class this year, with the fixed-income and global equities markets effectively seeing a rout. That is, the return on cash in real terms was less negative than the other asset classes (i.e. we are assuming here that our investment horizon is made solely of three potential allocations, Fixed Income, Cash and Equities).

Score: 0.5/1

The question remains whether our thesis around supply was what drove the price higher or trading patterns following the invasion.Score: 1/1

What we did see, however, was quite the opposite. The price rises would be substantial enough, and central bank policy was hawkish enough to slow down capital flows and alternative steel production. We also did not see the sheer scale of irrationality regarding the Covid-0 policy undertaken by Beijing, which they have quickly backtracked on after protests. If recent price action after the easing of lockdown restrictions in China is anything to go by, Iron Ore remains a China story for the foreseeable future.Score: 0.25/1

Again, this is one prediction that we got partially right. We are referring to the broader MSCI Asia (both Ex and including Japan), which has held up relatively well compared to the developed counterparts. We were partially aware that China would be a drag, and we were rather bullish on South East Asia. On the latter point, this prediction was rather prescient given that some of the best-performing indices were Vietnam and emerging markets in South East Asia. In India, we were wrong, with our prediction being that it was partially high, the SENSEX getting higher at the time of writing (YTD +5.9%).

On the question of the ASX, our prediction relied on a higher price level across the commodities complex, but this proved to be a little more complicated than expected. Again the story has been China (and related Iron Ore spot prices), the drag from broader commodities price stagnation and multiple compression.

Score: 0.5/1

With that somewhat less than stellar fair grade of 2.25/5, we continue on our fools errand and make five more predictions for 23′.

The question for Australia is similar, with the RBA arguably caught in a much more tenuous situation given the extent of household debt in the country. There are two primary questions to look out for, the increase in CPI at least M-o-M continues to average down. Secondly, wage growth.Assuming the current run-rate (i.e. inflation coming in at 0.1% for November, down from 0.4% in October), we should see it hitting a more manageable 4% p.a. in the US by the end of Q1 next year. On the question of wage growth, we state with some degree of conviction that these pressures will ease despite the current IR reform in this country. Our rationale is twofold: the shockingly low degree of union participation and the implications for collective action and the opening up of borders after close to two years in the developed world (i.e. immigration). On the former point of union membership, the latest statistics show that union membership has declined to the lowest on record (12.5% of employees in Aus).

That being said, the case for the Eurozone may be markedly different. The ECB has to deal with a somewhat complex set of economic factors, including divergent inflation rates across its jurisdiction and an asymmetric relationship between north and south (i.e. Germany and the frugal north vs. the likes of Italy, Greece etc.) They have been a rather prominent laggard in raising rates and thus may also be a laggard in normalising policy. Given the substantial overreliance on Russia, the energy cost is also not particularly helpful.

Despite the reopening of China, we continue to be bearish on that particular government, given a substantially higher probability of political instability (we have not said this about China in nearly five decades). China will, in our view, effectively go through its second wave, and the numbers will be substantial. The key to watch for the Australian investor is how big the stimulus from Beijing is to support growth targets. The question of whether there will be support is predetermined.On the question of fixed income, a spectacular rout in 2022 left many investors reeling and asking whether it may be more rational to take on equities exposure. If the downside for investment grade is in the double digits, we think the pricing looks relatively attractive within a central bank pivot across the developed world. This creates substantial upside and, for the discerning investor, the potential for an outsized risk-reward proposition. Although, we remain bearish over the long run, given the increased risk of financial repression.

The bears have come out regarding the price of black gold given the prospects of a recession in 23′. Our thesis remains for an elevated price level given the supply issues we previously elaborated upon for close to 2 years. Aside from this, there are three more factors to watch for here:

1. The impact of US price caps on Russian Oil.
2. Whether Moscow continues to decline in stature and effectively becomes second fiddle to Beijing and Delhi (i.e. the extent of bargaining power for those countries to ascertain at cheaper levels) .
3. Iran and Venezuela on the former whether the continued instability/sanctions take existing crude (i.e. round-tripped through Iraq) offline and also whether the Biden administration changes its stance on Maduro.

As it currently stands, even during a global recession, the supply metrics are such that we will continue to see elevated pricing.

Firstly, what a year for the yellow metal. Like the rest of the market, we have been left scratching our heads regarding the price action. While we have never believed that it offered a particularly great hedge against inflation, especially when compared to base metals such as copper, we have always been consistent in our view that it does offer a hedge against uncertainty. On the latter point, we saw the advent of a war that could have quickly escalated into one between two nuclear powers, the continued lockdown of the second-largest economy on the planet, yet the pricing was less than interesting. To date, two legitimate explanations stick; the first is the idea of gold offering an alternative as a store of value. Indeed, this does have some credence given the substantial rise from its lows of $1627 USD per ounce to $1807 USD. The second is that rising treasury yields have effectively placed a lid on the non-yielding metal.

The latter point is the most significant headwind for the yellow metal, and a significant net buyer in the form of the Russian central bank has been taken offline following sanctions. Thus, if we see, as is our base case, the Fed pivot and thus the dollar index start to taper a little, this should by extension, imply support for the shiny metal. That is, the uncertainty remains while the headwind could turn into a tailwind (i.e. a pivot could also imply negative real yields).

Over the long run, however, we remain convinced that the long-term cycle for Iron Ore (FE 63.5%) should be around the $200 USD/T to $250 USD/T mark. We define the long-term cycle here as anything above three years. As for the broader commodities complex, headwinds associated with global growth concerns are in our view, overdone. Even in the shortrun given the substantial supply constraints and the current pipeline of infrastructure built out both stateside and in major economies, including the EU (i.e. the market, it seems has already forgotten some of the already earmarked projects in the Inflation Reduction Act as well as the CHIPS & Science Act).