Acumen Portfolio Performance Q2 2022
Commentary on Portfolio Performance – Quarter 2 2022
Markets are forward looking and very quick to price in news. Unfortunately, as we are all aware, in the second quarter of 2022 they have had to take on board much in the way of negative messages namely rising inflation, the war in the Ukraine and the start of a cycle of rising interest rates. Unusually, government and corporate bond values have also been adversely affected at the same time as Equities.
However, there are some indications that the inflation outlook may be beginning to moderate. Long term inflation expectations as measured by what are known as swap rates have fallen, and the forward expectation of rising interest rates is also showing signs of moderating.
While risks remain, equity valuations are now well below their average since 1990 in most markets. The resilience of markets and ability to recover is often underestimated and the best advice for long term investors is to be patient and to remain invested.
Global equity markets are down more than 13% this year. Energy stocks were the only sector with a positive return year to date. The defensive healthcare and consumer staples sectors posted minor losses. Small cap stocks lagged by nearly 2% in June, matching the loss in large cap stocks for the year to date.
The rotation from “growth” stocks to “value” continued as investors watched interest rate forecasts rise. Geographically, UK and Emerging Markets fared best, the latter benefitting from easing of lockdowns and more supportive regulation in China. Unusually, US equities lagged behind its peers in quarter two performance. The combination of inflation and interest fears, coupled with supply chain issues resulting from Covid and the Ukraine War, has made this a highly unusual period for equities which have put in their worst first half year performance in over 50 years.
Market expectations of interest rate hikes by the Fed and the ECB in the current calendar year continued to rise in view of the high inflationary pressure.
The Fed responded to May’s higher-than-expected inflation figures with a 0.75% rise in interest rates, its biggest increase since 1994. The US 10-year treasury rate ended the quarter at 2.97%. The ECB announced it would end its asset purchase programme on July 1st and that we are likely to see a 0.25% interest rate rise in July (the first in 11 years), followed by a 0.50% increase in September. Bond values, which largely depend on future interest rate expectations, struggled against this backdrop. However, the extent of projected future interest rate rises began to weaken towards the end of the quarter, enabling bond values to recover slightly.
As domestic economic indicators remained healthy, Irish property returns for the second quarter were positive. Nonetheless, the commercial property market can be impacted by global economic conditions, and therefore we remain cautious over the short term. Property also has liquidity risks which can negatively impact mixed asset portfolios just at the time access might be most needed.
Brent Crude Oil was up nearly 20% for the quarter as the “G7” discussed a potential ban on Russian oil imports and China simultaneously eased lockdown restrictions. Gold fell back as the dollar continued to strengthen.