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May 2022- Market Commentary
By now, you have seen your Q1 reports; you may have also seen that April added more pain. When both stock and bond indexes are negative, it is extremely difficult to make money. If there is one clear message I have, it is to be patient. The world certainly seems to be in a messy state and we need to be prepared for volatility for the forseable future. Hopefully some of that volatility will be up and not just down, as investors see good assets being oversold and will start buying again. I have compared our performance to relevant funds of our main big-name competitors (e.g., Blackrock, Deutsche Bank, Goldman Sachs and others), and you should draw some comfort from the fact that our model performance is good, in some cases excellent, on a peer-review basis.
We have been a bit spoiled of late with significant market events. When Covid hit, it brought a major market crisis with much greater losses than we are seeing now in 2022, but the recovery was quick and many quickly forgot what investment risk feels like. Within a very short time, portfolios were positive again so that most investors hardly even felt the impact of the deep dive in equity markets of March 2020. This time it is different- we believe the recovery is going to be slower. The issues of high inflation, Ukraine, excess debt, growth concerns, oil supply, Covid and rising interest rates will not be solved as quickly as the initial Covid market reaction.
What can an Investor do? While the outlook is concerning, we must draw comfort from the fact that the world's economies are still functioning and experienced investors are buying. The increased uncertainty does not mean the system will collapse and we should abandon all investment strategies. We have experienced very high levels of uncertainty before. And this experience tells us that patience pays off. We hope the commentary below highlights the complexity and dilemmas we all face with our money.
2022 YTD Market Performance
Making Decisions in Uncertainty
When uncertainty is high, as it is now, the range of possible outcomes is wider. This makes positioning a portfolio for different scenarios complicated. For example, suppose you believe that inflation will remain high and Federal Reserve policy moves will not work. It would be best to have a short bond duration and maximum equities. If, however, you do believe that the Fed inflation policies will work to contain inflation, we need to understand the consequences of those policies and the time frame. Will rapid increases in interest rates cause a recession? If yes, you need to underweight all equities and long duration bonds.
Experts from the major firms we follow have different views, and even when those views are similar, their estimates of time frame vary. For example, some believe a recession is inevitable, but they differ on when it will be - in 2023 or later. Most agree it is unlikely to be in 2022. We hope to cover as many "market" scenarios as possible, knowing that parts of the portfolio will behave differently under different scenarios. Some of them will work, while some will not. That is risk management and it aligns with our mantra of not putting too many eggs into one basket. We have been through recessions before so that too is a natural part of the investment cycle.
The above is without giving special consideration to the situation in Ukraine, which is a tragic situation indeed and to which we cannot see a short-term solution for either. The indirect economic impact is imported inflation, but the sentiment is increasingly negative. That sentiment creates more sellers than buyers and this pushes the value of good assets down.
In our portfolio, we hold indirect allocation to Chinese companies like Alibaba. Alibaba is the Amazon of China. If you compare only the financial metrics of the two, Alibaba looks exceptionally cheap. With tens of millions of people in lockdown, we should learn from the Covid lessons from the western world where online sellers like Alibaba should benefit. Selling it because of Chinese Covid policies would not be the right thing to do. However, selling Alibaba because of China's association with Russia might be the right thing as the USA may punish Chinese companies further. As you can see, we face some serious dilemmas.
The localized outlook here is bleak indeed. Expectations are of a Syrian type long protracted destruction of Ukraine with Russia's seemingly endless and gas-financed resources will be thrown at a Western supplied Ukraine. We cannot see any end in sight for this war. Our focus is on the global economic and market impact. Immediate expected consequences include additional sources of inflation as fuel and food uncertainty lead to price increases. This type of imported inflation into the USA will not respond quickly to rate increases, and economists will struggle to split inflation between the Covid hangover and Ukraine's consequences. That type of geopolitical instability forces the government's hands to do things that would otherwise be impossible. That will be a source of volatility for a long time.
Bear Market in Equities
Many investors know and feel that market sentiment is currently highly negative. Goldman Sachs has a way to measure this sentiment, and they say this current situation is the fifth time since 2008 that market sentiment is more than two standard deviations from its average (which is a lot). The flip side of this is that typically, favorable equity market returns follow such negative sentiment reinforcing the asset allocation viewpoint that the scarier the world, the more aggressively one should be buying. Google Warren Buffet’s latest aquistions – he is buying.
Bonds Bonds Bonds
Bond investing is extremely difficult with inflation levels not seen for 40 years coming when interest rates are historically low. Bond prices go down when interest rates go up. The below graph shows the benchmark ten-year bond rate from 2017 to 2022. The current rate is pretty much where we were in 2019. Therefore, the losses of 2022 as interest rates rise were (if you were invested) matched with gains from 2020 when interest rates fell. If you closed your eyes in 2019 and opened them in 2022, you would see that your bond values are pretty much the same; however, we have enjoyed the fixed coupon (albeit modest coupon) over that time. This is what we mean by keeping your eyes on long-term numbers and less on short-term ones.
Should I sell everything and wait?
History tells us this is never the right approach, even through World War 2 or the 1970s inflation crises. Basic financial planning principles identify the time frame for investing and focus on the long term. When we say we are managing for the long term, we are. We need to manage the portfolio risks and client expectations as best as we can but running for the hills is not the correct approach in our view. The main reason for this is that by the time you get your confidence back you would have most likely missed the rebound.
The aforementioned information is not a substitute for personal Investment marketing, which takes into account the particular circumstances and special needs of each person. The views expressed in this Review should be considered as market comment for the short term for information purposes only. As such the views herein may be subject to frequent change, are indicative only and no reliance should be placed thereon. This Review does not constitute legal, tax or accounting advice, or any investment recommendation, or any offer to buy or sell financial instruments of any kind, and does not take into account the investment objectives or needs of specific investors. Although this Review has been produced with all reasonable care, based on sources believed to be reliable, reflecting opinions at the time of its writing and subject to change at any time without prior notice, neither Pioneer Wealth Management nor any other entity or segment within the Pioneer International Group makes any representations or warranties as to the accuracy or completeness hereof and accepts no liability for any loss or damage which may arise from its use. The writer and the company are unaware of any conflict of interest at the time of publishing the above commentary.
Mike Ellis Tuesday, 03 May 2022. Quarterly, half year and year-end review
About the Author
Director and Chief Investment Officer
Mike Ellis, originally from South Africa, joined Pioneer in March 2000 after working in the Private Banking & Trust industry in the UK. At Pioneer he was the group CFO for the better part of the last decade. Today Mike serves as a director and is the CIO.
Mike is a Chartered Accountant, a CFA charter holder and received his MBA from Tel Aviv University & Kellogg Business School. Mike is also an Oxford University Alumni having participated in the Said Business School's Global Investment Risk Management Program. In addition, Mike is a licensed Portfolio manager by the Israel Securities Authority.