27 Oct 2022
There is no use predicting market turns or keeping your eye on the price index. For the medium-to-long-term investment period we recommend, it is high time to put together a strong, diversified portfolio – while keeping a portion of liquid assets.
The value of a fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. The views expressed in this document should not be taken as a recommendation, advice or forecast. Whenever performance is mentioned, past performance is not a guide to future performance.
In recent years, we have seen the difficulty of investing in different asset classes while offering our clients a decent risk-return ratio. Put simply, everything was expensive, and we had no other choice than to live with this environment. Then, in 2022, the simultaneous drop in the prices of shares and bonds challenged the principles that governed portfolio-building and the virtues of diversification. Past excesses became costly under inflation.
Today, everything is becoming cheaper and more attractive. Yet we believe that inflation is unlikely to stay high over the next 6 to 12 months and also that the US economy will likely enjoy a soft landing, even if such landings have been rare in history.
The question we should now be asking ourselves is: do current returns make up for all possible risks? And all risks mean both known risks, like inflation, growth-related risks, climate change and geopolitical risks, and unknown risks, like exogenous crises.
Our job as asset managers is based on this ratio and the fitting returns we can offer. For us, in terms of strategy, the answer is yes: we believe the returns you can get are worth the risks you take.
Still, you need to be careful: this affirmation does not apply to all shares and bonds, but just a selection of these assets. For example, prices of Japanese stocks, some segments of the European and US markets, including American banks, are cheap and their profits follow the rising interest rates, in our view. And, they are better capitalised than in 2008. Emerging-market government bonds, which offer two-figure nominal yields, also serve as a basis for many of our diversified portfolios.
On the other hand, in our view, the US market as a whole – and the S&P 500 index – looks vulnerable: it could undergo a fall in corporate profits. We have sensed a certain optimism about forecast results – or rather a lack of pessimism. These forecasts continue to assume the economy will enjoy a soft landing. Although we foresee this scenario too, we think the chances of a hard landing are still underestimated. And experience has taught us this scenario should be incorporated into prices sooner or later. Markets usually venture to stare into the abyss before rallying.
The fixed income market may still be too complacent about long-term rates and bonds linked to inflation, the long-term breakeven points of which include prices cooling quickly. If inflation lasts longer than expected, we should get used to new unpleasant surprises.
These observations have prompted us to keep a neutral position while we wait for better purchasing opportunities. That is why we are keeping a higher-than-usual portion of liquid assets in our portfolios.
In conclusion, we think there is no use predicting the market’s next trend in the short term, or concentrating on the consumer price index or focusing on the next monetary policy decision. For the three-to-five-year investment time frame we look at, we think a world of opportunities already awaits us. We aim to acquire stock right now with a view to diversifying our investments and enjoying long-term returns.
We seek to build up a robust portfolio that can potentially weather any crisis with all the possible protection needed – while maintaining a portion of liquid assets to keep our hands free and looking to jump on new opportunities that emerge.
By Steven Andrew
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.