It has largely been driven by fears over surging inflation, rising interest rates, energy price shocks, the likely prospect of recessions, and geopolitical events such as the Russia-Ukraine war.

And all of those factors, among others, have combined to fuel investor nervousness, sparking market sell-offs that have caused widespread falls in many asset prices.

But not every investment market in the world has suffered. Some have actually gained ground.

Furthermore, different asset classes, and sectors within asset classes, have outperformed others.

Which is a timely reminder, as we near the end of 2022, that diversification across different markets and across different types of assets can help to reduce volatility and deliver smoother returns over time.

It’s a point that we emphasise every year with the release of a chart showing the importance of diversification, which accompanies the widely used annual Vanguard Index Chart.

What’s clear from the diversification chart is that the best and worst-performing asset classes varies from one year to the next.

Not only that, sometimes the best-performing asset class in one year can be the worst-performing the next.

How have share markets performed?

There have been wide variations in the performance of different stock markets this year, for a whole range of reasons.

The Australian share market, measured by the All Ordinaries Index, has fallen around 6.5 per cent year-to-date.

However, while our share market has slipped this year, largely as a result of the same economic factors gripping other developed countries, still-strong prices for our major commodity exports have provided some relief.

In addition, investors in our market have continued to benefit from the strong dividend payouts from ASX-listed companies, which in the 2021-22 financial year totalled more than $42 billion.

Another tailwind has been the 8 per cent fall in the value of the Australian dollar against the US dollar, which has helped many commodities exporters because their exports are priced in US dollars.

By comparison with Australia’s 6.5 per cent market drop , the United States share market, using the S&P 500 Index as the benchmark, has fallen more than 17 per cent this year.

It has been heavily impacted by economic sentiment, particularly over interest rate hikes, but also by the revaluation of mainly its largest technology companies, which have been trading on high price-to-earnings ratios.

So, which share markets have been the best performers in 2022?

Continued strong economic growth in India (6.8 per cent in 2022) – and a return of foreign investors – have been the key drivers behind that country’s share market recording a gain of around 6 per cent.

The Indian market, measured by the BSE Sensex Index, has outpaced Brazil’s, which measured by the Bovespa Index has gained just over 3 per cent. Brazil, like Australia, is a major commodities exporter.

Coming in behind India this year has been the United Kingdom, which despite economic and political upheaval has largely held its ground by recording a slight loss of 1.0 per cent year-to-date.

A number of the companies in the UK’s FTSE 100 Index have recorded broad gains, with the energy and tobacco sectors being notable strong performers.

From there on, the world’s other major share markets have all recorded higher negative returns.

Standouts are China (which has fallen around 12 per cent due to COVID-related restrictions, U.S. trade and political tensions, and the global economic slowdown), and Switzerland, which is down almost 15 per cent (amid concerns over interest rate rises and higher bond yields).

The U.S. market, as indicated, has performed poorly on a broad level. Measured by the Dow Jones Industrial Average (the Dow Jones), which only tracks 30 selected U.S.-listed companies, it has fallen by 7.7 per cent.

Major stock indexes: Past year performance*

Country	Market Index	Year-to-date Performance %
India	BSE Sensex	5.7
Brazil	Bovespa	3.2
United Kingdom	FTSE 100	-1.0
Japan	Nikkei 225	-4.8
Australia	All Ordinaries	-6.5
France	CAC 40	-7.9
Germany	DAX	-11.0
China	Shanghai Composite	-12.0
Switzerland	Swiss Market	-14.9
United States	S&P 500	-17.4

Data as at 9 December 2022. Source: Markets data. Past performance information is given for illustrative purposes only and should not be relied upon as, and is not, an indication of future performance.

How have bond markets performed?

Central banks have been forced to leap into action this year, raising official interest rates aggressively to tackle the highest levels of inflation in decades.

The Reserve Bank if Australia is among them, having raised rates eight times since May from a record low of 0.1 per cent to 3.1 per cent.

These rate hikes have seen the yields on new bond issues rise in tandem. At the same time, the trading prices of older bond issues have fallen because investors have been switching into new issues to capture more attractive yield returns.

Higher yields overall have resulted in many investors switching into fixed income securities to de-risk their portfolios from the more volatile conditions currently prevailing on share markets.

But one of the biggest dynamics playing out in the U.S. bond market right now is the inversion in the yield curve, where the yields (interest rates) on one and two-year fixed income securities are higher than those being paid on 10-year bonds.

As at 9 December, the yield on a 10-year Treasury bond was 3.47 per cent versus 4.62 per cent for one-year and 4.31 per cent for two-year fixed income securities (Treasury notes).

The yield on Australian government 10-year bonds on 9 December was 3.33 per cent.

An inverted yield curve can often be an indicator of a looming recession, because banks and other financial institutions are generally less willing to lend out money over longer periods at lower rates if they can achieve higher returns from short-term investments.

This can result in a reduction in overall economic investment, because many large-scale projects need access to longer-term funding to complete them. That, in turn, can reduce economic growth.

Economic and market outlook

Vanguard has just released its economic and market outlook global summary for 2023.

Our view is that investors considering portfolio changes in the face of a possible recession in Australia, and indeed other regions around the globe, should maintain a focus on the plan and objectives they have set.

Based on history, investors with a well-diversified portfolio and the mettle to stick to the plan and goals set in less turbulent times are often rewarded when the volatility ebbs.

Tony Kaye

Senior Personal Finance Writer

vanguard.com.au