The defining market characteristic of 2022 was about how sharply markets moved between styles as investors grappled with ever-changing macroeconomic conditions.
From an investment point of view it was “a terrible year”, says James Beaumont of Natixis Investment Managers, and added that for many investors the outcome was even worse than it might have been because they ignored diversification.
He says: “For most of the previous decade, it seemed like there was no need for diversification, and clients were almost saying to their advisers that they didn’t want to be diversified. But last year was kind of payback in that regard, particularly as the big tech stocks fell.
For Dorian Carrell, multi-asset investor at Schroders, the biggest change so far in 2023 is that “the markets are now happy to treat good news as good news.
"Previously, if there was good economic news, risk assets sold off because that was taken to mean interest rates would rise, and obviously in a scenario like that it’s very difficult to asset allocate.
"But in 2023, what we are seeing is that the normal diversifiers within a portfolio, such as bonds, are doing their job.”
James Sullivan, head of partnerships at Tyndall, says: “For the past 15 years or so, building a multi-asset portfolio has been akin to a golfer with only half their clubs in the bag.
"But that is changing, with bond yields now offering investors at least a nominal yield that is worthy of consideration, and if one looks through the inflation shock, then a longer-term real yield may also be had. Investment-grade, shorter duration credit looks good value if one considers the curve is flat at best – the premium pickup for duration risk just isn’t there."
David Coombs, head of multi-asset investments at Rathbones, says the economic data emerging around the world right now is “mixed” and so markets are “confused.”
But he says one area where a consensus is emerging is that interest rates may not rise by as much as had previously been expected, and it is this that led to technology shares “going on a bit of a tear” as investors focus on longer duration assets in 2023, as opposed to the shorter duration assets that were prioritised in 2022.
Coombs is uncertain that these consensus views are warranted, saying: “We have a situation in the US where unemployment is lower now, after a lot of rate rises, than was the case before rates went up. That is the precise opposite of what is supposed to happen, and leaves the Federal Reserve with a problem.
"In the UK, one of the things tat has helped consumers a little bit is that while food inflation remains high, energy prices are lower. And people spend more on energy than food so benefit a bit."
