The fund manager’s view
Geraldine Sundstrom, asset allocation portfolio manager, Pimco
If I had to distil 2022 into one major event, it would have to be the war in Ukraine, which created a supply shock resulting in higher inflation and lower growth. Faced with much more persistent inflation than expected, central banks were forced to act in raising interest rates aggressively.
While the war is clearly a human tragedy, it is important for investors because its impact fed into high correlations between stocks and bonds – with huge implications. Indeed, 2022 has been the worst year since the 1930s for 60:40 equity/bond portfolios, with large drawdowns the result.
For much of the past 20 years, the typical multi-asset portfolio has delivered strong risk-adjusted returns, largely owing to persistently low correlation between bonds and equities, with falling interest rates boosting returns.
However, this paradigm shifted in 2022 as the focus of central banks moved away from supporting growth at all costs to the more nuanced and difficult task of supporting growth while balancing inflationary pressures.
This changed macroeconomic regime and significant repricing of assets across the risk spectrum has meaningfully altered relative attractiveness in capital markets. While we remain cautiously positioned, we are starting to see attractive investment opportunities ahead, particularly in fixed-income markets.
The first sign we will be seeking is inflation peaking and consequently risk-free interest rates stabilising somewhat. Once that occurs, we can start to position portfolios for the next stage of the economic cycle.
The fund buyer’s view
Nick Wood, head of investment fund research, Quilter Cheviot
This year has been filled with drama, much of which has had repercussions on our selections. Rising inflation, and its consequent knock-on effects, stands out as most impactful.
Within listed equities, higher inflation – and consequently rising bond yields – has punctured a hole in the ratings of higher growth, long-duration companies, and resulted in value as a style having its first extended period of outperformance for a number of years.
For our portfolios, we made significant shifts in that direction early in the year, which have paid off. That included adding to UK value fund Schroder Recovery, which has performed well within the UK peer group, as well as introducing Pacific North of South Emerging Markets Equity Fund, a boutique, value-biased emerging markets fund that has significantly outperformed MSCI EM this year.
Within fixed income, rising inflation and the impact this has had on bond yields has been incredibly painful for investors expecting protection in a falling equity market.
However, the scale of the declines in bond prices has meant they no longer look quite so unattractive, and we have removed our underweight exposure accordingly.
Going forwards, while we will inevitably see more volatility in 2023, the pullback has meant we may be back to a point where the classic 60/40 portfolio does provide the appropriate diversification that for this year it clearly has not.
The analyst’s view
Guy Foster, chief strategist, RBC Brewin Dolphin
The most telling event of 2022, the result from the 20th national congress of the Chinese Communist Party, did not surprise anyone. Xi Jinping tightened his grip on the Chinese presidency. While this could be mistaken for continuity seeing as he has been in situ for a decade already, the event marks a consolidation of power which is a watershed moment.
China has spent three decades on what had been assumed to be a gradual but inevitable series of reforms, in which its ‘socialism with Chinese characteristics’ gradually becomes more like the developed, liberal economic models that have historically been most successful.
Globalisation brought China and the west together with mutually beneficial economic relationships. But now they are splintering and China’s response to this is to eschew the west and its economic model.
The themes of deglobalisation and decoupling between the west and China have obviously been in place for a few years now.
The change is that Xi’s consolidation of power seems destined to see China, now the world’s second-biggest economy, pursuing a top-down economic growth strategy dictated by the central committee.
The iron fist of central government has never been as effective as the invisible hand of capitalism in the past, and it seems destined to disappoint again. Away from the domestic economy, Xi’s new politburo will focus on nationalism both in its demand for economic resources and its ambition to achieve unification with Taiwan.
The wealth manager’s view
Julian Fryer, chartered financial planner, Fairstone
It has been one of the most difficult years for investors since the turn of the millennium due to several events: from Russia’s invasion of Ukraine and a spike in inflation, to the energy crisis, and most recently the mini-budget on 23 September, collectively causing wide disruption to financial markets.
While all are significant events, the sudden spike in inflation may well be the biggest factor both in terms of what has happened and the challenges we face going forward.
Current inflation is partly the consequence of financial policies that supported economies during the global financial crisis and then the Covid-19 pandemic, along with unpredictable factors such as Russia’s invasion and the weather.
Policies such as quantitative easing aim to pump money into the financial system so people can spend it. This availability to spend creates demand, which is inflationary anyway, but made worse when the supply chain cannot meet that demand.
Supply chain issues that started during the pandemic have persisted and have been exacerbated by Russian energy supply machinations and the continuation of Chinese zero-Covid policies, along with other factors, such as low river water levels in Europe and the US.
However, as with previous periods of uncertainty and downturn, they tend to be relatively short lived in the context of long-term investing.
Although sometimes hard to envisage, markets’ recovery from a downturn can be quite sudden and therefore it is vital to remain invested for when that happens. Part of our role as advisers is to provide our clients with regular updates and guidance, reminding them that these market gyrations are normal.
This article first appeared in the December edition of Portfolio Adviser Magazine
