07 June 2023

    Investor stock take of 2023

    The importance of balancing offence and defence in your portfolio

    Ashley Gardyne

    Chief Investment Officer

    Ashley Gardyne

    Chief Investment Officer

    Markets have had a strong start in 2023, with share markets outstripping defensive asset classes like bonds and cash. With a different set of issues facing markets than last year, 2023 is an important reminder that portfolios need to be multi-dimensional – with allocations to investments that perform in different environments. While too much offence (equities) would have hurt investors last year, too much defence would be hurting this year.

    Global share markets and many of our funds are performing strongly so far in 2023, despite the laundry list of issues facing the global economy – stubborn inflation, the recent US debt ceiling overhang, plus mortgage rates and cost of living concerns driving recessionary fears. So far this year, US share markets are up c.9%, Europe has gained 6% and the New Zealand market is up 3%. Our growth orientated flagship funds have also performed strongly this year:

    • New Zealand Growth Fund: up 8.5% year-to-date

    • Australian Growth Fund: up 11.0% year-to-date

    • International Growth Fund: up 17.4% year-to-date

    A different set of investments leading the pack in 2023

    In stark contrast to last year, the best performing asset class of 2023, so far, has been global shares, with the US in particular performing strongly. While the broad US S&P 500 indices is up 9% this year, the tech heavy Nasdaq Index is up 24%. In comparison, last year’s outperforming sectors – energy (due to surging oil prices) and utilities (due to their defensive characteristics) – are lagging in 2023, with these sectors down 13% and 9% respectively.

    While cash or term deposits provided ballast to portfolios in a falling market, this year they have acted like an anchor, with interest rates failing to outstrip the rate of inflation.

    This reversal of fate should serve as a healthy reminder to not go chasing last year’s winners. In fact, investors are often better off investing in assets that are temporarily out of favour.

    We’re facing different issues in 2023

    Recently the media had been paying a great deal of attention to the US debt ceiling and the risk of a US government default (although it seems that this risk has been avoided for now). But last year’s risk du-jour of rising inflation and the chance of an 80’s-esque inflationary spiral is no longer centre stage. Data in the US, Europe and New Zealand shows that these inflationary pressures are easing and were (at least partly) temporary aftershocks of the pandemic. In New Zealand, the narrative has also changed recently, with Reserve Bank of New Zealand indicating an end to the interest rate hiking cycle – with inflation starting to normalise and impacts of higher rates being seen in the economy (e.g. falling house prices and weak retail sales).

    Protecting yourself in an unpredictable world

    With different risks and economic drivers in focus, we often get asked: “what is the go-to asset class for 2023 and 2024?” Will it be bonds with interest rates starting to fall? Or the share market if inflation really is under control? Or gold if inflation surprises and stays stubbornly high?

    The simple answer to that question is that nobody knows for sure. Instead of searching for a “silver bullet” investment that will shoot the lights out this year, investors should focus on building portfolios that can perform well over the long-term in a range of different economic scenarios, regardless of the path that markets take in the short term.

    As we have seen in recent years – with pandemics, Brexit, wars, and both high and low inflation – change is constant feature in markets.

    How will your portfolio perform in a period of prolonged inflation like we had in the 1970s? How will it perform in periods of low inflation and low growth? What about in an environment of sustained economic and productivity growth, when real incomes are rising and you need your retirement income to do the same?

    Nobody can say what lies ahead, so investors need to make sure their portfolios are future proofed for whatever is thrown at them, especially in the 20+ years both before and during retirement.

    Different asset classes perform different roles

    This is why portfolios have a range of different asset classes – cash, bonds, shares, and property – in a range of different geographies.

    If, as we have seen recently, inflation and interest rates start to come down, what does that mean for investors? Term deposit investors may have locked in an okay rate for one year, but they may find themselves being offered a much lower rate in a year’s time (we call this reinvestment risk). If you had invested in corporate or government bonds instead, you could have secured a higher yield for five or more years – and you would potentially see the value of your bonds rise materially in value if yields fall.

    On the flip side, if inflation doesn’t come down and stays high for a prolonged period, investors need assets in their portfolios that will outstrip the impacts of inflation. In this scenario, cash and fixed income investments are likely to see their value go backwards, whereas property or share market investments are more likely to outstrip and offset the impact of this inflation over the long term.

    The point here is not to try and guess what may play out. It is to understand that over the years a lot of unexpected events will occur (the last three years are proof of that!), and a diversified portfolio with a range of growth and income assets is more likely to help investors achieve their goals. Investors always need to balance offence and defence.

    Talk to us

    If you would like to talk to someone about your investment strategy, the team at Fisher Funds are here to help. Please contact us or get in touch with your adviser.