Source: Wu Zhijian's doctrine of evidence

The year 2022, which just passed, is a very special year because it broke many records. 2022, for example, is the worst year for US Treasuries in the past 150 years (since 1872). The market value of US 10-year Treasuries fell by about 16 per cent last year, which has not happened in the past 150 years.

2022 was also one of the worst years for dollar equity and bond portfolios in the past 150 years. Take a combination of 60 per cent US equities and 40 per cent US Treasuries, which fell by about 18 per cent last year, with only worse returns in history in 1932 and 1938.

Naturally, many readers will ask the following questions: what happened? Why? What's next? In the next article, I will provide you with some perspective to analyze these issues.

First of all, from a geopolitical point of view, a lot happened in 2022. In February, Russia began a large-scale military operation in Ukraine, dragging the whole of Europe into a geopolitical crisis. In September, Nord Stream 1 and 2, the natural gas pipelines between Russia and the European Union, were deliberately sabotaged by unknown sources, further worsening mistrust relations between Russia and NATO members.

On the economic front, with the exception of China, most major industrial countries have experienced stubbornly high inflation. The following are the latest inflation rates in some major countries (data are based on December 2022): the United States (6.5%), the United Kingdom (10.5%), France (5.9%), Germany (8.6%), Canada (6.3%), Japan (4%) and China (1.8%). There are many reasons behind the high inflation, such as the rise in energy prices caused by the war in Ukraine, China's epidemic prevention and control policies have disrupted the supply chain, and in 2020, major industrial countries introduced overly loose monetary policies and pushed up the prices of all products and services in response to the epidemic. The end result of these different reasons is similar, that is, the central banks of major industrial countries begin to raise interest rates rapidly.

For example, the central bank of the United States, the Federal Reserve, raised its benchmark interest rate six times in 2022, raising the benchmark interest rate for the dollar from 0-0.25% to 4.25-4.5% in just 12 months. Other central banks, such as the Bank of England and the European Central Bank, have followed suit. The concerted tightening of central banks has had a huge impact on bond markets.

In the case of US Treasuries, for example, the yield curve completely changed shape and level in 2022. At the beginning of the year, in January 2022, yields on government bonds with different maturities were between 0% and 2%, showing a normal upward tilt from short-term to long-term. By the end of December, however, the entire yield curve had not only risen sharply by 200 to 400 basis points, but its shape had also been reversed, showing an inverted yield curve, that is, yields on short-term bonds were higher than those on long-term bonds.

Outside the US Treasury market, the UK bond market has not stopped. Sterling bonds are affected not only by the monetary policy of the Bank of England, but also by the farce of its own politicians. Between September and October 2022, Leeds Truss resigned 45 days after taking office, becoming the shortest-serving prime minister in British history. Meanwhile, the yield on 10-year gilts soared from 3.1 per cent to 4.5 per cent and remained high at about 4 per cent when Mr Truss resigned. The pound fell sharply to a low of 1.07 against the dollar at the end of September and then slowly recovered to around 1.2 at the end of the year. For the whole of 2022, the pound depreciated by about 11% against the dollar.

Global stock markets have reacted poorly to the turmoil in bond markets. The following is the performance of the world's major stock market indices in 2022:

Us S & P 500: down 18.1%, NASDAQ: down 32.4%

Nikkei 225: down 7.4%, Germany's DAX: down 12.3%

Hong Kong's Hang Seng Index: down 12.6%, Shanghai Composite Index: down 15.1%.

In other words, most major stock indexes have fallen to varying degrees in 2022, especially the trend of technology stocks has been reversed by 180 degrees. Of course, it has to be mentioned that in the past three years, due to the quantitative easing policy of the central bank triggered by the epidemic, as well as the global trend of working from home and learning, the technology sector did well in 2020 (the Nasdaq 100 index rose 47%) and 2021 (the Nasdaq 100 index rose 26%). However, the mean return finally arrived in 2022, hitting the secondary market hard and almost freezing the private equity market in major economies.

Some readers may ask: I understand what happened in 2022, so what should I do next? I can't just sit back and wait.

It is normal to think like this. Doing something is the most natural first reaction of human beings to a future full of unknown risks and uncertainties. In the past few months, I have read a lot of articles advising investors to sell their stocks and bonds and reallocate their money to other alternatives, such as gold, cryptocurrency, renewable energy, or private equity. The logic behind it is also easy to understand: both the stock and bond markets are underperforming, the macro environment may have changed, and stocks and bonds no longer offer good returns to investors. So why not try other assets?

However, this may also be the most wrong response. There are several reasons:

First of all, what most of us see is what has happened. For investors, however, what is more important is what will happen in the future? It is true that stocks and bonds did not perform well in 2022, but this is public information: everyone knows. It doesn't tell us what will happen next, 2023 and beyond.

If we can learn an important lesson from the ongoing war in Ukraine, it is that we need to be aware of our limitations: the future is almost unpredictable.

Back in February 2022, can Russian President Vladimir Putin foresee today's war? My view is negative. Mr Putin probably thought Kiev would fall within a week and that Ukraine would be as easy as Crimea. In fact, Mr Putin is far from the only one who cannot predict the future. According to a survey conducted by the Gorshenin Institute (Gorshenin Institute) in early February 2022, despite repeated warnings by US intelligence agencies that more than 150000 Russian troops were massing on the Russian-Ukrainian border, only 1/5 of Ukrainians thought Russia would "fully invade". 62.5% of the people thought the invasion would not happen. In other words, on the eve of the military operation, even Ukrainians themselves do not believe that war is coming.

Thanks to online social media, anyone in this era can easily spread his views to the world through short videos at any time. But the problem is that being able to say it out loud doesn't make your point any more correct. Back in 2020 and 2021, almost everyone became an expert on COVID pandemics, mass immunization and the effectiveness of mRNA vaccines. Now fast forward to 2022, almost everyone has become an expert in the war between Russia and Ukraine. They are familiar with Ukrainian cities and towns, even more familiar with their own geography. Since the beginning of the war between Russia and Ukraine, numerous experts have predicted that the war will end within 48 hours, 72 hours, a week, and a month.

Based on the same logic, it is also very difficult to deduce the trend of the stock market from the macro analysis. The laziest way to predict the trend of the market in 2023 is to simply assume that the decline in 2022 will continue linearly into 2023. But in turn, it is equally reasonable to guess that the mean return will have an effect on the stock and bond markets again in 2023, driving the market to rebound.

At present, the yield on the US 10-year Treasury note is about 4 per cent, which is very attractive to investors and provides support for bond prices. If investors choose to turn to other assets and stay away from stocks and bonds now, there is a risk of going short in the next rally. Of course, no one can guarantee that the market will rebound in 2023, or when it will come, but you can't ignore the probability of its existence.

Second, just because something has a price does not mean it is an asset. The author defines assets as things that can bring endogenous returns to investors. Stocks that pay dividends, bonds that pay interest and houses that generate rent, for example, meet this standard. However, cryptocurrency or gold, even if the price goes up and down, does not meet this standard. So investors need to be cautious before buying.

Third, when we decide what type of asset to invest in, we should consider the market efficiency of the asset and the investment cost of owning the asset. An effective market should meet the standards of high transparency, strong liquidity and high level of governance. Large stocks, government bonds and large corporate bonds listed on stock exchanges, as well as large public funds and ETF, meet this standard. Private equity, cryptocurrency, etc., do not meet this standard, so individual investors should focus on investing in the former and ensure that they only buy those liquid investment targets, that is, at any time, investment products that can be redeemed and cash back within a week.

The past 2022 has taught many of our investors a lesson. I hope you can sum up valuable lessons from it and avoid overreacting wrongly. We should adhere to the investment principles that we think are effective, such as cost control, diversification and long-term persistence, and repeatedly remind ourselves to adhere to rational investment and not to be unduly disturbed by the noise in the market. only in this way can we get our own long-term returns.

Edit / phoebe