Bevan Blair, Chief Investment Officer at One Four Nine Portfolio Management, shares his latest outlook for global markets with IFA Magazine
“We may never see a year like 2022 again, or at least not in the foreseeable future, as there are no certainties in markets. The confluence of high inflation and loose monetary policy caused an upheaval in bond markets, the likes of which has never been seen before – and there has been real pain for investors to endure as a consequence.
“Thankfully, we start 2023 in a much better place for expected long-term returns now than we did a year ago. It is highly unlikely that we will see a repeat of last year in bond markets this year. Starting yields are significantly higher now and more importantly, the riskiness, as measured by duration, is lower. The payoff of bonds is far less asymmetric than it was 12 months ago and their risk is lower. We are starting to get paid for taking risk again in bond markets. This is especially true in investment-grade markets at the lower credit quality end. It will take a number of years to repair the damage, but if yields start to drift downwards, even slowly, then capital will recover.
“We must however be mindful of the effect of a re-opening Chinese economy. China has been a closed shop for nearly 3 years and the relaxation of covid restrictions may well release a large amount of pent-up demand. This would be inflationary globally, and the deflation that China had been exporting for decades could easily turn into an export of inflation, especially if this demand supports raw material prices.
“The signs are however hopeful. Hopeful that rates have peaked and hopeful that inflation too has peaked and will now fall back towards target for most central banks. Yields on bonds are now at a level that supports their underlying riskiness, at least in certain parts of the credit curve, and investors should now experience more ‘bond-like’ returns from bonds over the year.
“The equity market’s biggest worry, apart from a general increase in the cost of capital, has been the effect of rate rises on economic growth. In the US the first and second quarters of 2022 saw falls in GDP, with the US entering a technical recession. However, the third and fourth quarters saw a return to growth at just under 3% annualised.
“Moreover, the effect so far on corporate earnings has not been the disaster that many feared. Earnings have held up surprisingly well and many corporates have been able to pass on some price increases to consumers without a significant fall in demand. It seems now that the likely scenario is for below-average growth for a while, but no outright global recession, especially if China starts to expand again.
“The big unknown is what the longer effect of rate rises in the second half of the year will have on growth. In general, it takes around 9 months for the effects of a rate rise to be felt in the real economy, so we are only now feeling the effect of rates rising from historic emergency levels to very low ones. The rate rises of late 2022 will start to manifest themselves in the second quarter of 2023, so we are not out of the woods yet in terms of recession risk, economic growth, and its effect on corporate earnings.
“Looking ahead, with cash starting to offer some decent nominal returns, bonds through the worst of the rate rises, and equities at a better valuation point, there is a significantly higher probability that a balanced portfolio will perform better than last year, providing positive return and some diversification, a feature they sorely lacked last year.
“For those that were uninvested last year, this is now a good point to enter the market, and for those that have ridden the wave, there is much to be hopeful about recovery in hard earned capital. Expected returns for all asset classes look much better than they did a year ago and there is some room to add risk in portfolios, mindful that if the recessionary conditions worsen that there will be short-term pain. The balance of probabilities is for better long-term performance from portfolios.”
