First, inflation is bad for stocks as well as bonds. Second, the rise in real rates increased the discount rate applied to corporate cash flows, lowering valuations. Third, stocks usually perform poorly in rate hiking cycles – see the 2016 Annual Review. The surprise therefore is that the Numis All Share fell by just 2.5%, beating the world equity return as we will see later in the Review. While, after inflation, the real return falls to -12%, this figure is still unexpectedly robust.
2022 was the year of the megacap, but not the small-cap
The explanation, as we will see below, is that 2022 was a year of strong returns for a handful of UK mega-caps. It was certainly not a good year for small-caps, with the flagship Numis index, the NSCI XIC, returning -17.9%. Given the background, this was to be expected. Equities generally perform poorly in hiking cycles, but small-caps tend to do worse, with a negative small-cap premium – see the 2016 Annual Review.