Have our expectations for future returns improved or deteriorated in the last few months?
Another obvious trend is that the extraordinary levels of investor complacency seen at the end of last year have reduced. As you know, we have been concerned about market levels and asset class valuations over the last six months. There remains the potential for more of the unprecedented flows we have seen into risk assets to reverse further in the coming months, as many investments are yet to fall back to long-run historical averages from the heady prices of late 2021. However, if the global economy does not tailspin into an untimely recession and central bankers don’t tighten the monetary screw on markets too much, there is the real chance that recent market falls have created a much better outlook for asset market returns over the next few years. Attractive opportunities have been presented to investors across a wide range of assets. While we are not being “gung-ho”, we have started to tactically allocate capital to favoured investments that have been unfairly treated, and we are ready and able to move more aggressively should we become more confident that a major global situation can be avoided.
What has happened to our investment strategies so far in 2022?
The first two months of 2022 were reassuring for our portfolios from a relative perspective: both our diversified approach and specific investment selections helped to cushion the worst of the falls witnessed across global equity and global bond markets. Since the start of March, investing has become much more challenging and falls across markets have become indiscriminate, meaning that the ability to protect as efficiently has become harder. We have been able to offset some of the losses experienced in equity and credit markets through our “hedges” in inflation-linked bonds, commodities and gold investments, whilst our high-quality fixed interest positions have also reduced potential losses. However, falls in many markets in Europe and Asia have become larger as the threat of a growing conflict has risen, reversing the outperformance such markets enjoyed at the start of the year. Assuming that the current crisis doesn’t evolve into the global conflict outcome outlined above, this is probably a “buying opportunity”. We are certainly much more comfortable with equity valuations and excited by some of the valuations and income opportunities available in credit markets. This should increase the potential for future portfolio gains, and we feel strongly that the seeds of future success can be sown in the volatility we are presently experiencing. However, we are being selective and specific and aim to continue with a tactical approach.
Conclusions
The situation in Ukraine is terrible, and one can only hope it improves rapidly and the country and the people there can recover quickly. Our “base case” is that the situation in the country does stabilise when Putin believes his aims have been achieved, but we must be clear that the chances of both a prolonged military engagement and the possibility of a further increase in global tensions is also possible.
At the same time, the outlook for inflation has become more uncertain and the spike higher in food and energy prices is a suppressant for global economic activity. The growing issues around inflation also make the job of the central bankers harder. In very simple terms, the biggest macroeconomic drivers are in a state of flux and there can be little certainty about the short- to medium-term directions of both the global economy and financial markets.
