As we enter the last quarter of 2023, it got me thinking about what we have had to deal with over the last three years.
I was doing this as the October Consumer Price Index (“CPI”) numbers came out for both the UK and the US, and they were lower than expected. This essentially sent equity and bond markets upwards, as markets not only expected the Federal Reserve (“FED”) to cut interest rates next year but, more importantly, it signalled that any further potential FED rate hike this year would now be almost completely off the table.
FED Chair Jerome Powell has always said that the FED would be reliant on the data before making changes to the interest rates. Therefore, if the data next month changes and is not quite so favourable, there is still potential that markets may react negatively. As somebody who has been involved in the investment industry for over 20 years, the last three have been anything but straightforward. This has been due to a number of factors, as Kevin, our CIO, has outlined in previous updates:
“Never have we suffered a pandemic, followed by a war, inflation and the ensuing rate hikes as well as an energy crisis.”
This backdrop has played havoc with the investment markets and there have been few hiding places.
Below are some of the numbers we have been seeing in markets, which show that life has been anything but straightforward.
|
|
2019 |
2020 |
2020 sell off 20 Feb 2020 to 20 March 2020 |
2021 |
2022 |
2023 |
2019 to 16 November 2023 |
|
Bloomberg Global Aggregate Credit Hedge |
1.2% |
6.8% |
-9.8% |
-1.1% |
-15.3% |
2.5% |
-8.4% |
|
FTSE 100 |
28.8% |
-11.6% |
-29.7% |
18.5% |
4.7% |
3.2% |
13.2% |
|
MSCI Emerging Markets |
16.3% |
14.7% |
-19.4% |
-1.6% |
-10.0% |
1.6% |
3.1% |
|
MSCI World Healthcare |
49.8% |
10.0% |
-15.8% |
20.9% |
6.5% |
-6.0% |
33.2% |
|
MSCI World Information Technology |
162.5% |
39.3% |
-23.3% |
31.0% |
-22.1% |
40.6% |
100.1% |
|
MSCI World |
64.0% |
12.3% |
-25.0% |
22.9% |
-7.8% |
12.1% |
42.7% |
|
MSCI World Equal Weighted |
33.7% |
6.2% |
-27.4% |
15.9% |
-6.3% |
3.3% |
19.2% |
Source: FE Analytics
Past performance is not a reliable indicator of future performance and may not be repeated.
What the above table highlights is that all main asset classes have posted a negative return in sterling, in at least one calendar year. Our most defensive asset class, which in normal circumstances are bonds, has suffered the most – this was not down to the pandemic or war, but the ensuing inflation and higher rates that followed.
Bonds are fairly simple mathematical instruments, as the price has to adjust to take into account the interest rates you can get in cash. For example, the interest rates over the last decade have paid close to zero, and as we stand today, cash rates have increased by 5%. Something therefore must adjust and in regard to bonds, it is the price, which has, unfortunately, headed downward.
Saying that, the better inflation print we have seen during October has been helpful as these assets have rallied well. As I said, bonds are simple instruments, so while the higher interest rates over the last three years have hurt, the expectation of lower rates next year have helped.
A key factor to mention with regard to bonds is the longer the term to maturity of a bond, the more volatile the return profile. This is very important when it comes to building portfolios, as understanding volatility can help to smooth the “rollercoaster ride” of these markets.
In our multi-manager portfolios, we have a number of bond exposures, including ultrashort (fondly known as “posh cash”), short-term (bonds that mature in two to three years), medium-term (what we refer to as “the belly of the curve” and mature in six to nine years) and longer-term bonds.
The bond allocation has performed as expected, so, for example, the short-dated and “posh cash” have behaved and, since 2019, are all in positive territory, up somewhere between 5% to 7% (Source: FE Analytics).
Although our belly of the curve funds have not fared quite as well over that same period, we have minimal exposure to the longer end.
All this volatility, in what should ordinarily be the “ballast” in our portfolio construction, has made our ride slightly more of a “rollercoaster” than it has been historically. We are all hoping that 2024 is kinder, and the world settles down to some normality, both from a geopolitical stance as well as markets.
On the upside, volatility breeds opportunity, and we feel our bonds investments are showing good value going forward. This opportunity led to the launch of our Higher Income* fund – as they say, every cloud has a silver lining!
If you would like further information on volatility, Holly Warburton and I recently recorded a podcast on the subject, which you can listen to here.
*Please note that the Ravenscroft Higher Income fund is only available to Channel Island investors.
