November 2022 / ASSET ALLOCATION VIEWPOINT
Adapting to a New Investment World
Investors face new opportunities and challenges as we head into 2023
- While 2022 was challenging, with both global equity and fixed income markets falling in tandem, the future may bring higher expected returns but also higher volatility.
- We believe that investors should consider five ways to adapt to the new investment world. We explain each of these in detail in the following article.
- We believe that a well‑managed, well‑diversified multi‑asset strategy could be an efficient one‑stop solution to potentially benefit from all five suggested approaches.
Introduction: 2022—A Difficult Year for Investors
This year has been disappointing for investors in public markets. Equity and fixed income investments across the globe have fallen sharply after strong returns, particular to equity markets, leading up to and after the coronavirus pandemic. What made 2022 especially challenging was that both equity and fixed income markets fell in tandem, making it very difficult to diversify portfolios. Figure 1 illustrates this, using returns of US equities and US Treasuries for calendar years since 1928. This year is a clear outlier in a historical context.
Calendar Year Total Returns of the S&P 500 and US 10‑Year Treasury
(Fig. 1) For the period 1928 through 2022 (to 30 September)
Figure 2 highlights the five worst years since 1992 for a portfolio of 50% global equities and 50% global bonds. We consider portfolios made up solely of global equities and global bonds, represented by the MSCI All Country World Index (ACWI) measured in euros (EUR) and the Bloomberg Global Aggregate Index hedged to EUR, respectively, throughout this paper. While many other investment types are possible within a multi‑asset portfolio, we believe the overall findings would be generally similar.
Returns of Global Equities, Global Bonds and a 50/50 Mix
(Fig. 2) For selected years 1992–2022
It is noticeable that the losses on such a supposedly ‘balanced’ portfolio in 2022 would have been close to those seen in 2008 during the depths of the global financial crisis. Unlike other difficult years, the decline in 2022 hit both global equities and global bonds.
A Changing Investment Environment
Falling markets have brought one silver lining, however. Valuations in equity and fixed income markets, which stood at multiyear highs for many markets as we entered 2022, have fallen back sharply.
The yields on US 10‑year Treasuries had only been lower 13% of the time over the 15 years to the end of 2021, but this has now changed drastically. Government bond yields, credit spreads and equity valuation multiples now generally look close to, or below, average levels seen over the period.
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