A rough start to the year
2022 hasn’t started with the same market momentum we saw in 2021, driven by the combination of more hawkish central banks signalling an exit from emergency levels of stimulus, prospects of moderating economic growth and geopolitical tensions between Russia and Ukraine. This has caused market volatility and performance losses across equity and bond markets, with limited asset classes (commodity prices being an exception) providing positive returns.
A sharp rotation within equities
This has been accompanied by a sharp reactive move away from certain equities. Previous winners, the so-called “growth” companies, generally exposed to innovation and the digital economy, have trailed behind the so-called “value” companies such as banks and energy that are generally exposed to the physical economy. The difference between “growth “ and “value” returns this month is the largest since 2005 so we are talking about a sharp and large gyration over a very short time span.
This rotation can also be observed at the regional level with US markets being particularly hit - the extreme example being the Nasdaq, an index tracking the performance of technology companies, falling by 13%. We take a globally diversified approach to investing, with for instance a larger exposure to global equities than the UK. We maintain conviction that this wider opportunity set should provide investors with potentially stronger risk-adjusted returns in the long term.
Why staying invested pays off
Since the start of this year, the broader world equity market is down by around 7%. To put this move into context, this is actually fairly normal with such corrections happening in 16 of the past 20 years.
Market volatility notwithstanding, we aim to deliver strong risk-adjusted performance for our clients over the long run. For those with long term investment goals, our philosophy is to stay invested as ‘time in the market is much more important than timing the market’.
As economies reopen and we emerge from the pandemic, even with slightly higher interest rates, we believe this remains a fundamentally good environment for global economic activity. Despite the near-term uncertainties, we continue to think the environment is supportive for risk assets. We remain comfortable with our tactical allocations such as US equities and Emerging Market bonds, while maintaining limited exposure to lower-yielding government bonds.
In short, we continue to remain constructive but expect higher levels of volatility this year. This makes a long-term and diversified strategy ever more important. We will keep you updated as our view evolves.
Toby Vaughan, UK Chief Investment Officer
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