2020 will be remembered by most market watchers as a period of shock followed by a remarkable rebound thanks to the swift, decisive intervention by central banks. 2021 saw this resilience buttressed by the deployment of highly effective COVID-19 vaccines across developed markets, leading to another year of very strong equity market gains. So far, 2022 looks set to be a year of change, as central banks embark on the path of monetary policy normalisation, and some of the big winners in equity markets over the preceding two years give back some of their gains, making way for previously overlooked stocks in cyclical areas of the market.
In the present environment, we believe ‘balance’ will be a watchword for asset allocators. The Omicron variant of COVID-19 offered a timely reminder of how rapidly the market mood can shift, highlighting the value of an investment process shaped through many previous market cycles. Brooks Macdonald’s international funds range, which comprises the risk-based Multi-Strategy Funds (MSFs) and the objective-based fixed-income International Investment Funds (IIFs), offers a good example of how a diversified strategy can help you prepare for the market gyrations we expect in the year ahead.
Equities: cyclical recovery and long-term drivers of returns
One notable feature of 2021’s equity market was the oscillation between growth and value stocks, making a balanced approach important. In the years leading up to the pandemic, growth stocks led the way, driven by the ever-increasing reach of the technology giants into all areas of life, coupled with low interest rates that made high valuations easier to justify.
Throughout last year these supportive factors for growth stocks remained in play, and tech sector earnings appeared to defy gravity in many cases. However, value stocks have delivered almost identical returns in the year to date, and the turnaround in equity styles has gathered pace in recent weeks. This long-neglected part of the market was primed for a rebound amid the economic growth that was facilitated by the deployment of highly effective vaccines, together with unprecedented levels of monetary and fiscal stimulus. Within our international funds, active allocations to equities lifted returns by capturing the outperformance of select cyclical sectors amid the brightening economic outlook we saw during 2021.
Another driver of returns has been our continued exposure to thematic equities. Given the prominence of short-term threats and opportunities around potential interest rate rises or new variants of COVID-19, it’s worth remembering that the long-term investment theses around areas such as health care and technology have remained intact, and in some cases have strengthened.
Fixed income: finding pockets of value
2021 was not kind to holders of government bonds, as the increasing mood of optimism led investors to prefer riskier assets that would benefit from stronger global economic growth. Rising inflation as a result of heightened demand and supply chain bottlenecks, meanwhile, steadily lifted expectations of interest rate rises.
In the UK, we have already seen the first step on the path to policy normalisation, with an increase in the benchmark interest rate from 0.1% to 0.25% at December’s meeting of the central bank. In the US, markets are currently pricing in four interest rate rises in 2022 as inflation continues to run far ahead of the central bank’s target range. Although the pace of monetary tightening remains uncertain, it’s clear that the ultra-loose policy that characterised the pandemic era is set to change.
With developed market government bonds delivering negative total returns in the year to date, our preference for corporate debt has proved supportive. Given mounting expectations of interest rate rises, short duration corporate bonds outperformed longer duration debt. Again, our funds were able to capitalise on this Asset Allocation Committee-led view.
This period of change in market dynamics highlights the value of an investment process that has been tested throughout many previous economic cycles. To make sure we deliver the best possible investment options for clients, our centralised investment process aims to generate the best ideas and then use them as widely as possible, delivering strong risk adjusted returns for clients with an explainable process and explainable results.
Please get in touch with your Brooks Macdonald representative or send us an email at bmiadvisersolutions@brooksmacdonald.com to find out how we can help guide your investment journey. We would be delighted to hear from you!
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