Markets extend their recovery as the end of tightening comes into sight
Markets extended their recovery from the September lows as we entered what has generally been a seasonally strong period and while some of the negative factors overhanging sentiment started to ease. November began with further widely anticipated rate hikes in the US and the UK, to 4% and 3% respectively. However, the policy statements accompanying these moves noticeably diverged. While the US Fed remained hawkish in its outlook, the Bank of England was at pains to guide market expectations for the future level of rates lower. This softer monetary stance was partly a result of new Chancellor Jeremy Hunt's move back to fiscal austerity, unveiled in his Autumn Statement, and partly an acknowledgement that the UK economy had officially entered a mild recession.
A below-forecast inflation print sparks a euphoric rally
As the month progressed, data in the US also weakened, providing further evidence that multiple rate hikes were starting to take effect across the Atlantic. There was finally some good news on the inflation front: the US core CPI print of 6.3% for October came in well below market expectations. Markets greeted this news with a euphoric sigh of relief.
There were further signs that even lagging indicators such as the labour market were also starting to cool, with tech giants including Meta Platforms, Amazon, Twitter and Lyft announcing large-scale layoffs following weaker than expected third-quarter earnings. This suggested that overall economic data would continue to soften going forward, reversing many of the factors driving inflation. The biggest single contributor in this regard had been the earlier surge in energy prices. Price volatility had since evaporated: the oil price continued to drift lower and was trading broadly in line with where it started the year.
Markets rallied as this series of weaker data finally prompted Fed Chair Powell to soften his hawkish stance, stating that "the time for moderating the pace of rate increases may come as soon as the December meeting." Both equity and bond markets surged. Having started the year at 1.1% and risen to a peak of 5%, the yield on UK 30-year gilts fell back to 3.5%.
Mid-terms disappoint Republicans while Chinese protests force change
In other events, the anticipated Republican "Red Wave" failed to materialise. The US mid-term elections saw the Democrats retain control of the Senate but lose their majority in Congress by a slim margin, with increased political stalemate the most likely outcome during the Biden administration's remaining term in office.
Global equity and bond markets as a whole rose 3% in sterling terms, led by gains in Asia. Equities in Europe and the UK recorded gains of 7%, while 2% gains in the US were muted by US dollar weakness. Chinese equities surged by a historic 25%, as authorities signalled a potential shift away from strict zero-covid policies following a wave of protests that swept the nation in a rare and unified display of public anger.
A challenging year, but portfolios ahead of their benchmarks
2022 was a challenging year for investors across the risk spectrum. With equities and bonds declining in tandem there were few places to hide. Our portfolios weathered these tough conditions well: all of our standard portfolios significantly outperformed their respective benchmarks for the year to date. While portfolio values had fallen, they declined by considerably less than their corresponding benchmarks and in doing so achieved first-quartile performance. Our focus on capital preservation cushioned our exposure to market falls.
Dealing with uncertainty is an integral part of our remit, and we have navigated through many such events over the years. History has shown that despite periodic corrections, markets trend up over time. Our focus is on building robust all-weather portfolios that can deliver strong returns over the long term and help smooth volatility along the way. As an example, our flagship low-medium-risk income portfolio had gained 85.2% since the start of 2012, a period that included a number of negative events. It achieved first-quartile performance, outperforming its benchmark by a significant margin of 29.3% (31/12/11 to 30/11/22).
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
Animal spirits return, but we have been here before
Hope of a peak in the rate of inflation drove a resurgence in animal spirits that saw US equities rally by 17% from trough to peak in the space of six weeks. We had, however, been here before: markets staged a similar rally during the summer, only for expectations to be dashed. We were cautiously optimistic that we were indeed nearing the end of policy tightening, but would like to see inflation on a more established downward path to confirm the trend. A lasting recovery would most likely have to wait until central banks begin to cut rates.
Looking forward, the narrative was likely to shift to predicting the length and magnitude of a global recession. There were clear downside risks to growth, but so far the data was not that bad. Most economists were expecting a relatively mild recession through 2023. While the overall macro environment remained unclear, valuations were much less demanding than when we entered 2022. The US price-to-earnings multiple was a full 3 points lower at 17X, while the UK was a historic bargain on a mere 9X. Bonds were also looking better value for the first time in many years. At the start of the year, yields on 10-year government bonds in the US, UK and Germany were 1.5%, 1.0% and −0.1% respectively. Those same bonds were now yielding 3.5%, 3.1% and 1.9%.
Buying assets when valuations are cheap is the best way to generate superior long-term returns.
Going into 2023, lower valuations had significantly improved the risk-versus-reward outlook compared to twelve months earlier. Economic data was likely to get worse before it got better, but markets were already pricing in a great deal of bad news and would likely move to discount a recovery in advance. Rebounds can happen swiftly and there is little point in trying to get the market timing exactly right. Our portfolios had raised cash in order to capitalise on such opportunities.
All of our standard portfolios have significantly outperformed their respective benchmarks for the year to date, leaving us in good shape going into 2023 when many of the current issues clouding the market should hopefully begin to ease.
Overweight unloved regions
On a global basis our standard portfolios remain overweight the UK, Japan, Asia and emerging equity markets, where valuations look much more appealing than in the US.
Income for resilience
Overall equity exposure is focused on defensive income funds that own companies with strong cashflow and resilient balance sheets. These should provide relative safety as the growth outlook slows, while dividends accumulate at attractive yields.
Hedging inflation risk
Portfolios hold assets that should prove relatively robust in a higher-inflation environment, including index-linked bonds, infrastructure, renewables, gold bullion and precious metal and commodity stocks.
Cash ready to deploy
We have raised cash across portfolios in order to capitalise on attractive entry points as they arise. Lower valuations have significantly improved the risk-versus-reward outlook compared to twelve months ago, and rebounds can happen swiftly.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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