The Only Way Forward
07th October 2022
Thank you for your patience
07th October 2022
2022 has been a very challenging investment year. One of the most challenging on record. The year started with heightened geo-politics, and it continues to face into significant geo-political risk. This year we have had three quarters of poor investment market returns. Will the final quarter of 2022 produce some positivity in what has been waves of negativity? Are we closer the bottom of equity markets? Many markets are off some very significant numbers. How will this all end? I will seek to address some of these issues in this note.
Q3 was mixed for investment markets. After a strong July, August and September returns were negative with downward pressure on investment markets. Inflation data often surprised on the upside. In the past few months, interest rate expectations for the rest of this year and into next year continue to move up. 0.75% rises in interest rates are common, with perhaps even larger rises possible. It can be argued some central banks are still behind the curve and need to be more proactive. There will be a time for pause, it is just not now, a time, however, will come.
Markets reacted to this fresh inflationary news with further falls, as short-term risk moved into safe haven assets. The US dollar as the global reserve currency of choice continues to be dominant. It is very telling to note the mis-pricing of interest rates and such expectations by the markets, and the subsequent volatile move in government bonds, often more than equity like moves and volatility.
It seems the lows of the recent market falls could be tested again. We do not know, no-one knows. A recession to bring down inflation is inevitable but recent policy making has been mixed with the UK showing some fiscal easing in the face of rising interest rates. Lack of coordination by entities is poor and needs to be addressed. Credibility is important.
Investment markets are still concerned around inflation and its persistency. The expectation was that by now inflation would have peaked, and the movement downwards would be pretty evident. This has yet to really happen. The policy (errors) from the covid ‘lockdown’ were pronounced and are still being felt in markets now. Geopolitics is playing a part, but it is primarily policy mistakes from 2020 and 2021 that are now being felt across economies. None of this was exactly forecastable, but the signs and some of the symptoms were there at the time. Inflation is still expected to come down to more normalised levels, but not to the levels pre-pandemic.
High and persistent inflation hurts consumer purchasing power and disproportionately affects the poorer in society, they feel it more in their weekly spending, especially spending on essential goods –food etc. Furthermore, high and persistent inflation then creates (rational) expectations that individuals need to manage such movements in prices with their own individual motivations, primarily wage demands, as wages go up, above trend, then this has its own inflationary impacts, dangerously this can then become self-fulfilling and further increase prices and so it goes on. A vicious cycle of higher prices no-one benefits from but suffers. To control such a scenario is difficult, even more in the face of economic contraction. The supply side needs to work and work much better, and it could be that further government intervention to improve supply side dynamics, develop reforms, is required.
We take a more patient capital approach. We manage through the volatility of markets but at the same time always aware of what is surrounding us: patient capital with deep understanding. The next few years, even this decade will be very different from what has gone on. We need to be fully aware of this and be well positioned to deliver on the new realities of investment markets and returns. Some of the core themes we believe in: disruption, technology, healthcare will still be relevant, and I would argue be even more relevant, so being exposed here with high conviction and in a controlled manner is right. Other areas could move differently, if facts change, we will change. We need to do our own pivot. Timing market movements is difficult, so we do not try to, we have no real expertise here. We will only know time afterwards when we exited this current bear market (if we are not through it already).
We have a strong pillar in our strategies to absolute returns and are looking at this very carefully: the dynamics of each strategy and to possibly add further to give more diversification and play on differing micro and macroeconomic themes. These strategies offer us capital protection as well as upside opportunities across different assets, assets we are not ordinarily exposed to. For some of our portfolios the allocations here are substantial. We very much see this allocation as a foundational pillar to support long-term return generation for clients. It is one of our three investment pillars.
Bond markets this year have also had a torrid time, many exhibiting equity like volatility with often similar returns. Yield curves have moved quickly and perhaps beyond sound ‘normal’ fundamentals. At current levels mid and long-dated government and corporate bonds look attractively valued.
Bear markets do come to an end, there is always positivity as companies, countries continue to grow and develop. We want to be well positioned for such scenarios. We will not know the exact bottom of such markets falls. It is sensible to be positioned well when such a cycle changes for the better. Invest now for the long-term view, invest now and be patient.
In summary, as we regularly emphasize at Binary Capital we continue to take a long-term approach to investing and do not deviate from that philosophy even in times of severe market stress, even now emphasize that more so. Be patient, be focused, and focus on investment deliverables at all levels and all times.
We continue to look ahead with dedication to do the right things, be on the right side of the themes running through economies and general society. By taking a longer-term approach the irrational noise will die down, and true themes will properly emerge for further long-term return generation.
Chief Investment Officer
Binary Capital Investment Management
By making an investment, your capital is at risk. The value of your investment depends on market fluctuations outside of our control and you may get back less than you invest. Past performance is no indicator of future performance.