The Vanguard MSCI Index International Shares ETF (ASX: VGS) suffered through 2022, with the exchange-traded fund (ETF) falling by 14%.
It wasn't the worst-performing ETF by far. For example, the Betashares Nasdaq 100 ETF (ASX: NDQ) dropped by around 30% last year.
Indeed, it was a rough time for a number of markets and sectors. While the ASX didn't fall much because of its large weighting to ASX bank shares and ASX mining shares (which did well), there were a number of ASX tech shares that did suffer.
Why did the Vanguard MSCI Index International Shares ETF decline?
An ETF's return is dictated by the return of the underlying holdings. If the combined return of the holdings is positive (taking into account the size of each position), then the ETF's return can be positive. Each ETF has a management fee, with this one costing 0.18% per annum, which reduces the return.
If we look at the biggest holdings within the ETF, there are a number of the world's biggest, most recognisable technology businesses including Apple, Microsoft, Alphabet, Amazon.com, Tesla and Nvidia.
In 2022, the Apple share price fell 27%, the Microsoft share price declined by around 30%, the Amazon share price dropped by 50%, the Alphabet share price declined by around 40%, and the Tesla share price plunged 65%.
Interest rates have soared higher as central banks try to put a lid on inflation. But, this is hurting share prices, particularly ones that have a lot of growth factored into their share price.
Billionaire Ray Dalio, founder of Bridgewater Associates, once said:
It all comes down to interest rates. As an investor, all you're doing is putting up a lump sum payment for a future cash flow.
What next for the global share market?
According to reporting by Reuters, the World Bank has cut its 2023 forecast to a level where many countries are on the brink of recession. Global growth is now expected to be 1.7% in 2023, which would reportedly be the third-worst year in 30 years, behind 2009 and 2020. The World Bank was previously predicting global growth of 3%.
The Eurozone and US are now predicted to grow by just 0.5%. That's not great for the Vanguard MSCI Index International Shares ETF considering Europe and the US are where a large majority of the ETF is invested.
Reuters reported that the World Bank said in a statement:
Given fragile economic conditions, any new adverse development – such as higher-than-expected inflation, abrupt rises in interest rates to contain it, a resurgence of the COVID-19 pandemic or escalating geopolitical tensions – could push the global economy into recession.
Rising interest rates may well have the biggest impact in 2023. The US Federal Reserve has continued to be committed to doing what it takes to bring inflation back to normal.
Federal Reserve Chair Jerome Powell continues to talk about enacting decisions to do what's needed. CNBC reported on comments from Powell in a speech for Sweden's Riksbank, he said:
Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time. But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy.
The absence of direct political control over our decisions allows us to take these necessary measures without considering short-term political factors.
Foolish takeaway
I don't think the global share market is going to perform strongly for most of the year. I believe that the US Federal Reserve is going to leave interest rates at a high level for longer than plenty of investors would like. However, when interest rates stop rising, it could be a catalyst late in the year, particularly if inflation significantly reduces.
But, in my opinion, the Vanguard MSCI Index International Shares ETF still has a very promising long-term future. The quality of the 1,500 or so businesses is good and I think the global diversification is great.
