The start to 2022 has been tough for investors. Having passed the halfway point of the year, you will have seen numerous articles pointing out how 2022 has been one of the worst starts to a year in decades. We have officially entered a “bear market”. Global share markets dropped 21%* in the first half of the year, typically resilient government bonds have fallen 15%^, domestic house prices are falling, and talk of a potential recession has ramped up. This is now one of the worst ever starts to a year for equity markets, and the worst start ever for bond markets.
With equity and bond markets falling in tandem, there has been nowhere to hide. For a balanced portfolio investor in the US (selected due to more historical data) this is shaping up to be the third worst year on record.
Worst Years on Record for US 60/40 Portfolio
Source: NYU, Bloomberg. Note: 60% S&P 500 Index, 40% 10-year US Govt Bonds
A vastly different investment environment
The economic landscape has changed drastically over the last twelve months. This time last year New Zealand’s inflation rate was running at 3.3%, the Reserve Bank of New Zealand hadn’t started hiking interest rates, and global central banks were still talking about inflation being transitory.
Fast forward to today, and inflation is running at 6.9% (the highest rate in 40 years), we have a war raging in Ukraine, and central banks around the globe are hiking interest rates aggressively to head off inflation. The rapid rate hikes, and the prospect of skyrocketing mortgage costs has also spurred recession concerns.
With financial markets having swung aggressively to reflect this changing economic backdrop, the investment outlook is also very different than it was a year ago. Interest rates have more than doubled over the last year. As an example, the running yield on our Income Fund has gone from approximately 2.5% a year ago, to 6.5% today. We have gone from a world where bond yields were unlikely to outstrip inflation, to one where investors can now expect to earn a significant premium over medium-term inflation.
Equity valuations have also come down materially. Twelve months ago, global equity market valuations were trading well above long term averages. Today they trade at a discount. We believe there are some great businesses that will deliver attractive long-term returns from today’s depressed valuation levels.
While the recent journey has been painful, the destination is shaping up to be much more attractive.
Tail risks exist, but some of them are already priced
While there are still a lot of risks out there, recent market declines mean some of these are already reflected in market prices. The 12 US recessions since World War II resulted in a median decline of 24% for the S&P 500. If we have a mild recession in 2022 or 2023, then there may only be another 10-15% downside. On the other hand, if we avoid a recession and inflation slows, markets are likely to be materially higher in a year’s time.
In the 12 months after entering a bear market in the US, the S&P 500 has delivered a median positive return of 24% (and markets have gone up two-thirds of the time). There is no guarantee that this will happen this time, but history suggests the odds are in investors’ favour.
With lower starting valuations, the investment opportunity set is looking more attractive
As we have seen on numerous occasions in the past, we believe investors that hold tight through the current turbulence will ultimately be rewarded. The flip side of falling share prices and rising interest rates is higher expected returns.
We like the investment opportunity set we are currently faced with. We are using current volatility to gradually reposition client portfolios and capitalise on the attractive investments our team are finding. There is no guarantee this will result in gains over the next three or six months. But over the long-term we are confident that our portfolios will deliver good outcomes for clients.
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.
*MSCI World Index
^Bloomberg Global Aggregate Treasuries Index
The 'R' word
A quick search on Google Trends reveals that the number of people searching the term ‘recession’ has skyrocketed this year. The most recent spike in May is closely aligned to comments by US Feder
Wisdom from Omaha
Investors need no reminding that the start to the year has been volatile. Global share markets fell 8% in April, bringing the year-to-date decline to 13%.
Watch: The Smart Investor - Looking past volatility
Facilitated by our Chief Client Officer – Cath Lomax, our panelists discuss the current volatility and how Fisher Funds, as experienced active investment managers, are working through it while maintaining our long-term investment strategy.
Listen: How KiwiSaver has changed over the last 15 years
In this episode our Chief Investment Officer, Ashley Gardyne, sat down with New Zealand Herald's Business Editor at Large, Liam Dann.
They discussed what is causing the current market volatility, how it is impacting KiwiSaver investors and what they should do. They also look back at how KiwiSaver has evolved over the past 15 years and what needs to happen to keep it growing and succeeding as a scheme.
The psychology behind unlocking better investment returns
Investing success hinges more on mastering our emotions than it does on mastering financial markets. That’s because of how susceptible we are to a host of unconscious biases which can hijack our rational thinking. Identifying our emotional tendencies is the first step in controlling them. The second is putting in place steps to counteract these impulses.
Volatility and active management
The start of 2022 has been accompanied by a host of worries for investors and non-investors alike. Stock market volatility is at once a symptom and one cause of these worries. Fisher Funds’ active investment approach means that we proactively capitalise on the compelling investment opportunities unearthed by market volatility. We have recently added some new investments to our portfolios at prices we believe are very attractive. We profile one of these below - the software giant, Salesforce.
Overcoming the wall of worry
The shock invasion of Ukraine by Russia has added another risk to the list of investor concerns. Inflation, interest rates hikes, a share market correction – and now a war. While selling investments or switching strategy ‘until the coast is clear’ might feel like the right thing to do in turbulent times, snap decisions can also do significantly more harm than good. While the environment may feel grim now, markets tend to climb as the wall of worries recedes.
Investing in an inflationary environment
Most of us were pretty happy to say goodbye to 2021, but if you are still feeling a little gloomy, you’re not alone. Aside from COVID-19 and its many iterations, we have been left with record levels of inflation and rising interest rates. A perfect storm for homeowners, struggling to meet increasing living costs, pay down the mortgage and save for retirement.
A rollercoaster start to the year
Share markets have had a rollercoaster ride so far this year, and understandably the ups and downs have made some investors and market commentators nervous. But turbulence is a natural feature of markets. For long-term investors it can actually be a blessing in disguise.
Learning to embrace market volatility
The new year is already shaping up to be far more volatile than 2021. Less than a month into 2022 we’ve already experienced a significant sell-off in many markets around the globe. Concerns regarding inflation, rising interest rates, and the prospect of central banks withdrawing quantitative easing this year have sent shockwaves through markets. At one point this week, both the New Zealand and US markets were down more than 10% from their peaks, while the tech-heavy Nasdaq Composite is still down over 15%.