Ahead of Time – November 2022 Update

We all want stability and certainty in our investment returns. It is an ideal outcome. Such an outcome is very difficult to achieve in reality. It is something we think about a lot as we make investment decisions on behalf of highly sophisticated clients, often institutional clients.
Having a high allocation to absolute return strategies is one way of stabilising investment returns in an environment of very high uncertainty. This is something that is core across many of our investment strategies and has added value greatly this year.

To look ahead, firstly we need to look back. It has been a difficult year for investing, a true challenge to make positive returns for clients. Persistent inflation has affected policy making. 2022 was the year the interest rate cycle turned, and the power of the bond markets came through. We started the year with geopolitics and end the year with the continuing conflict in Ukraine. In my view history will not judge policymakers well this decade so far, the failure of political leadership in the past few years has been noticeable and there is no serious sign that is going to improve in the coming years, indeed it could get worse before it gets better.

Whilst we may be over peak inflation (in the US at least) the concerns now move into how quickly can inflation come down and how will economic growth develop or lack of, as many economies head into recessions in 2023, and how will such economies navigate away from a growth phase balancing inflation (still) and normalised interest rates. The core returns from any portfolio will come from equity markets, whilst there will be challenges to come there, equity valuations are increasingly attractive, especially in our favoured core markets of the US and Asia. As valuations look to become more attractive, we will be looking to add to such positions alongside a further diversified approach to investing.

2023 will not be a repeat of 2022, it will play out in its own way with returns increasingly focused around themes: healthcare and biotechnology proving to be particularly attractive and interesting. The focus on long-term trends is still a priority for us. This will only become greater as we move through this decade. It makes sense to continue to invest at these attractive valuations for long-term return generations. We seek to invest in a patient manner and view the coming months as a good time to invest or to add to positions for those clients who seek genuine returns away from moderate consensus thinking.

During the year we moved significantly into absolute return strategies, and that has proven to have been a positive and productive strategy during the volatile year. Beyond that asset allocation switch we have remained relatively stable around the asset allocation and fund selection with the equity focus being around core equities, with a slight bias towards growth markets.

What will we do in 2023? We will be patient. We will be focused and continue to invest in a global manner. As the west goes into recession, the US will be the first out, it is a country that we continue to favour so have significant allocations there. We are also bullish on China and believe their issues around covid will slowly ease, as they open up (they have to) economically in the coming weeks and return to a new normality. At the same time the Chinese government interventions across different sectors will dissipate, producing more opportunities for investment returns.

In November we had strong positive returns in the various investment strategies we manage, driven primarily by strong returns from the US as the inflation number there came below expectations and also interest rate expectations eased marginally. The absolute return investments were stable during the month. As said previously, China seems to be proving to be of interesting return value and over time will help with overall return generation.

As we look ahead, we see 2023 producing volatile returns, therefore we would want stability in many of our return outcomes and our absolute return allocations aims to provide that with less correlations to equity and fixed income returns. Creating returns when trends in general investment markets are less certain. together with the opportunity and flexibility for enhanced return generations as investment markets normalise at attractive valuation levels.

More positive times are indeed ahead and could be closer than many realise. We look forward with optimism.

Saftar Sarwar
Chief Investment Officer
Binary Capital Investment Management