As 2022 comes to an end, you may be reflecting on what the year meant for you. Like so many other regions around the globe, Europe started the year with the hope of emerging from the Covid pandemic and optimism for a less volatile year ahead (we know how that turned out!)
In February, Russia invaded Ukraine, delivering hardship and suffering to people there, and a ripple out effect on the global economy, causing much uncertainty, price pressures and the volatility everyone was hoping to avoid in 2022.
As our last article of 2022, we discuss four key financial stories from 2022 and what they might mean for the year ahead and for you as an expat in Europe.
1. Energy prices skyrocketed
According to Euronews, at the end of November gas and electricity prices had risen 24% year on year, however, many of you will have experienced much larger increases in your utility bills. One of the main drivers of this has been Russia’s invasion of Ukraine, which resulted in many western countries reassessing their prior dependence on Russian oil and gas.
This in turn created shortages around the eurozone, with Germany being particularly hard hit after it suspended the Nord Stream 2 gas pipeline from Russia. As a leading importer of electricity within the EU, Italy also saw its energy prices spiral, while countries like Sweden – which generates more of its energy at home – fared much better.
By the end of 2022, the European Commission has looked to cap the price of gas. Some nations including Belgium, Italy and the Netherlands are introducing price caps to protect small businesses and consumers.
It has meant many expats living in Europe have turned their thermostats down and brought out extra blankets to keep warm while managing the higher cost of energy within household cash flow management.
As we progress through winter into spring and the acute heating costs pressure eases, it focuses the region and the world on alternate energy sources. From an investor perspective, sustainable energy may become an increasingly important component of a diversified portfolio with the prospect of potentially strong returns while doing something good for the world.
2. The cost of living soared
It wasn’t only energy prices that were affected by the war in Ukraine, as the cost of food also spiralled. This is in part because Ukraine is the world’s fifth largest exporter of wheat, and Russia’s invasion meant grain could not be exported, resulting in a surge in prices.
Data from Statista shows that the cost of food was 17.26% higher in October 2022 when compared to the year before. This echoed an article by Euronews, which revealed that in August the cost of bread in Europe had soared by an average of 18% year on year.
The rising price of food and energy helped push up inflation – which measures the increase in the cost of living – in the eurozone. This was also in part to the capital that was injected into markets during Covid. We warned back in 2020 that these actions, while necessary at the time, would likely have an inflationary impact over the next few years. It appears that inflation may have peaked in most parts of the world now and is reducing from its high point.
A higher inflationary environment will likely be the new reality for the next couple of years. It’s not all doom and gloom though, as higher inflation can sometimes mean more and different investment opportunities. We expand on this below.
3. Interest rates rose for the first time in 11 years in the Eurozone
Typically, interest rates are increased to reduce rising inflation as it helps reduce consumer spending, one of the main drivers of inflation. In 2022 it was a bit different because much of the inflationary pressure was because of a shortage of supply rather than an excess of demand. However, to slow inflation, central banks around the world raised their cash interest rates. The European Central Bank (the ECB) increased its base rate from -0.25% to 0.5% in July, which was the first increase since 2011. Since then, it has raised rates three times and the rate is now at 3%. Historically, this is not high, but it is a different scenario from what the EU has lived for the last decade.
There are challenges and opportunities for expats in Europe. If you have a fixed rate mortgage, it won’t impact you, but do keep an eye on when it expires. A change in rate can impact your cash flow. One more positive point is that banks have ceased negative interest rates on bank deposits.
For investors, higher interest rates can be positive. It can mean the potential to get a competitive rate of return from non-equity investments, such as government and corporate bonds. This is being assessed within actively managed discretionary portfolios. It is important to keep in mind as interest rates and inflation are higher that you make sure your investments and assets are keeping pace and not being eroded by this increase in cost of living.
4. The stock market has seen uncertainty
If you have a diversified portfolio or investments in shares, you will know this already: the stock market has had a volatile year in 2022. In particular, in the first half of the year, it suffered falls.
While investors should always expect short-term downturns, stocks and shares typically increase in value over the longer term. When downturns happen, it’s usually best to remain calm and wait for your investments to recover when the stock market bounces back. We know this is often easier said than done and needs to be applied to your circumstances. We have discussed this at length in our review meetings with our clients.
The long term trend of equity markets is highlighted in the following illustration, which shows the MSCI between December 2012 and December 2022.
As you can see, while there have been major downturns along the way, the index has grown significantly during the period. Always remember that the value of your investment can go down as well as up, and past performance is not a reliable indicator of future performance.
Market falls also present opportunities for investors and depending on your timeframe, risk profile and objectives, it may be a good time to review your holdings and position your assets, not for what has happened, but for the future and in line with your goals.
In summary, 2022 has been a tough year for many but one which has reminded us the importance of communication and staying in touch with you, our clients, and the value of professional advice. It has also reminded us of some core investment market fundamentals, key being that we should focus on our long term objectives. Finally, it has presented opportunities to reassess household cash flow management, to assess where and how investments are allocated and to be ready for markets, as they inevitably do, recover.
Get in touch
As specialists in helping expats in Europe, we would be happy to discuss your financial situation and options for 2023. Please contact us on [email protected] and we’d be happy to help.
We wish you the very best for this holiday season, thank you for being with us in 2022 and look forward to working alongside you in 2023 and beyond.
This article is for information only. Please do not take action that is based on anything you read in this article until you have sought professional advice.