June 2022 / INVESTMENT INSIGHTS
Winning by Not Losing: Building Portfolios for a More Challenging World
Generating positive returns in tougher conditions requires new thinking
- Challenging market conditions and deeper structural shifts are demanding fresh thinking from investors.
- Such thinking may include new ways to help mitigate the impact of volatility on equity portfolios, adapt the role of government bonds, and use active management to potentially benefit from market volatility.
- We believe that ideas such as these will help investors to manage losses while potentially generating inflation‑beating returns.
The first five months of 2022 have not been easy for investors. A powerful cocktail of difficult economic conditions and rising geopolitical concerns have made their mark: The S&P 500 Index was down by more than 12% from January 1 to May 31—its worst record over that period since 1970 (Figure 1).1
The S&P 500’s Start to 2022 Was Its Worst in 50 Years
(Fig. 1) It was down by 14% from January to May 31, 2022
In recent years, multi‑asset investors have generally been able to rely on their fixed income holdings to cushion the blow if equity markets fell. However, these diversification benefits were notable for their absence over the first four months of this year. As equities plummeted, U.S. fixed income was hit by its worst drawdown since 19802—in fact, it was the first time since at least the mid‑1970s that the U.S. equity and fixed income markets both experienced a drawdown more severe than 10% at the same time (Figure 2). These losses were especially painful in inflation‑adjusted terms, as rapid price increases across many major economies led to the purchasing power of investments falling even more.
Equities and Bonds Fell in Tandem Over the First Four Months of the Year
(Fig. 2) It was their worst parallel drop since the mid‑1970s
There seem to be five main reasons for the continued declines of global equity and fixed income markets so far this year: (1) the accelerated pace of monetary tightening by central banks such as the U.S. Federal Reserve, (2) persistently high inflation, (3) concerns over slowing economic growth, (4) disruptions caused by China’s strict zero‑COVID policy, and (5) Russia’s invasion of Ukraine.
Another factor behind the uncertainty is that markets are simultaneously undergoing several structural shifts: from pandemic lockdowns to reopening, from low and stable to high and volatile inflation, from super‑accommodative monetary policy to tightening, from globalization to a focus on local supply chains, and from U.S. hegemony to a realignment of powers. Still recovering from the shock of COVID, the world must now contemplate a slew of new challenges. During structural shifts, investors and markets need to adapt—and adaptation typically involves uncertainty and volatility.
What can investors do to generate positive inflation‑adjusted returns in this market environment? Or, to put it another way, where can they lose the least money? To help achieve these objectives, we have identified three investment ideas, each of which is shaped around one of the possible regimes that lie ahead.
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