Opportunities presented for investors
Schizophrenic financial markets, shifting central bank policies, inflation concerns and slowing growth were all central to the projections we made about 2022 during the second half of last year, and are all things we have tried to position for. We would expect this bout of volatility to persist, even if some of the hardest hit investments are starting to look attractive, and there will be major reversal days in both directions. We are about to add some selective positions in UK corporate bonds that have already reacted efficiently to the likelihood of future UK interest rate increases, offering attractive yields for nimble investors.
For those asking whether we have seen sufficient pain in equity markets already, we would suggest that a few weeks of volatility (albeit with some truly eye-opening negativity in the former market favourites) is not sufficient to offset the excesses that have built in some markets in the last few years. Our expectation is that we can continue to see pain in the areas of asset markets that have been inflated by the promise of never-ending central bank and government support, as well as zero interest rates. Some specific areas, such as renewable energy companies and other environmental themes, have already reached levels where we are comfortable increasing our allocations to a favoured long-term theme.
UK equities finally outperform
We must be clear and say that we are not overtly bearish on financial markets, but we are respectful of the fact that we believe that the “game has changed”, at least in the short term. We continue to hold that the core view that we have held for the last six months of “most concerned about markets since at least 2018 and most optimistic on specific investments since 2015” remains true. Some of our clients have asked about the differential between UK equities and global investments in 2022 so far, and we would suggest that this is down to the idiosyncratic nature of the UK equity market. The UK equity market has a high weighting in banks and energy companies, which have performed well in 2022, a complete contrast to 2020 when the UK equity market was down 10% and global investments and standard Balanced portfolios made positive returns. Our portfolios are global in nature and the UK equity market is not a useful guide to how our portfolios might be performing, although we are pleased to see the UK market performing better. It has been a long time since outperformance from the UK market has been observed and there is a decent chance that this change in fortune might persist for longer.
Conclusion
This is not a time for panic. The overall behaviour in markets that we are experiencing is what we have been expecting. This market volatility will afford us refreshed opportunities for our clients’ portfolios. Taking a “Balanced” and “Diversified” approach remains sensible. Plenty of tantalising areas for making clients’ positive returns exist, but it could be that the end of 2021 finally brought an end to the impressively rewarding strategy of just owning anything, and that 2022 and the period ahead is a time for differentiation. This makes us very excited.
