Perspective

Webinar: Market update and economic outlook


• 2022 has been a challenging year for investors. As of the end of the third quarter, global equities were down 25%, and global bonds were down 20% from the start of the year (both in USD terms). Returns for sterling-based investors have been stronger as a result of currency moves (as sterling has weakened, the value of overseas investments has risen).

• The poor performance has been driven by rapidly rising interest rates as central banks attempt to bring inflation under control. Central bankers are particularly worried about “sticky” inflation – such as wages and housing costs. They are less concerned about inflation resulting from higher food and energy prices.

• Historically, bond markets have tended to deliver positive returns when equity markets have struggled, allowing investors to achieve smoother returns by holding both asset classes. That has not been the case this year. Based on UK data, a portfolio split equally between equities and government bonds would have delivered its worst return in over a century. Over the longer term, however, our data shows that holding both equities and bonds remains compelling.

• UK bond markets and sterling are likely to remain volatile. It is interesting that UK bond markets started to weaken in August, as Liz Truss pulled ahead in the Conservative party leadership contest. The move did not begin with the “mini-budget.” The government had already harmed its credibility with international investors by criticising the Bank of England and firing a well-respected Permanent Secretary to the Treasury. Liz Truss resigned as prime minister shortly after this webinar.

• We expect developed markets economies to head into recession next year. The key question now is how long and how deep these recessions will be.

• We remain cautious on equities in general. Markets are still expecting some growth in corporate profits next year. This looks too optimistic, given that US earnings have on average fallen 13% during recessions. To turn more positive on equities, we want to see expectations for next year’s earnings fall. We would also want to see signs that interest rates are close to a peak. This would probably require weaker labour markets. More positively, we are seeing some attractive opportunities amongst high-quality companies with strong balance sheets and pricing power – especially those benefiting from longer-term trends, such as healthcare and energy transition.

• We recently upgraded our view on fixed income to neutral. We have been buying shorter-dated government bonds and also increasing exposure to credit markets.

• We continue to like commodities. Historically, they have helped to protect portfolios from inflation shocks. They should also benefit from the ongoing energy transition. Low CAPEX in recent years means the supply of many commodities is constrained. However, increased investment in electrification and renewable infrastructure will create significant demand for these materials. The combination of low supply and strong demand should be good for prices.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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James Brennan

Portfolio Director james.brennan@cazenovecapital.com