From negative returns to bond yields, current investment trends mapped

So far, 2022 has been tough in the markets, with a broad range of investments delivering negative returns. Many of the largest investment markets are down year-to-date and both corporate and sovereign bonds have produced high single-digit negative returns.

Equities have been worse, with benchmark indices in Europe and the US down well over 10 per cent.

This reflects a more difficult global environment. Interest rate expectations were already moving higher towards the end of 2021.

Central banks had to address high inflation which was clearly less ‘transitory’ than many had expected. And then, the crisis in Ukraine, as well as being a terrible event on a human level, brought a new threat to economic growth and exacerbated inflationary pressures, pushing rate expectations higher still. The market is now pricing more hiking from the Fed in 2022 than in any calendar year since 1980.

But the investment world has seen crises before. Over the last few decades we have seen the dot-com crash, the global financial crisis, the Euro sovereign crisis and the Covid-19 pandemic, along with multiple other periods of volatility. For active investors, the right approach is continually to assess and re-assess the risks – and the rewards that are available in return. There are always problems but there are also opportunities.

Inflation is high. US core inflation is over six per cent, though some of the factors that have driven this number up may weaken in coming months. But others look set to strengthen it further. So, it is hard to see inflation coming down to the Fed’s target of two per cent very soon. On the other hand, bond yields have risen significantly. The two-year treasury yield is 2.7 per cent – as recently as September 2021, it was just 0.2 per cent.

We must also acknowledge that the outlook for global growth is poorer now than a few months ago. In the last few weeks, data on economic activity and sentiment has weakened. Our European equity team thinks one per cent could be knocked off previous expectations for GDP. But there are also factors that are supportive for European companies. On the consumption side, the high level of excess savings built up since 2020 will do a lot to offset the impact of higher prices. Investment stands to be boosted by the need to make supply chains more resilient and to reduce reliance on external energy sources as well as continuing the transition to a lower carbon economy.

Where does this leave investors who are interested in income and total return?

Many remain cautious,  holding on to lower risk, low volatility assets. In response, a growing number of fund managers have begun to reduce exposure to some of the more volatile in the last few months, in light of the less-positive outlook for growth.

But importantly – keeping in mind portfolio diversification and balance – there are still reasons for investors to look at  more risk in certain areas. The credit markets, for example, are seeing increasingly more attractive pricing than we have seen for quite a while.  Well-researched investors have been buying bonds in a range of financial and corporate issuers, where yields provide a boost to the income the funds produce.

It is also notable that the global high yield market is currently yielding nearly three per cent more than the summer of 2021, and while overall interest rate risk of funds remains low, there are signs of an uptick.  This trend certainly makes sense in the context of higher government bond yields.

The task for fund managers is now, of course, very much the same as always: to search markets for investments, in equities and in bonds, that offer attractive rewards for their risks.  The global economic landscape is more complex and much less certain than it has been in recent times – but, with the right analysis, a portfolio can be built that delivers on an investor’s income and total return mandates.

The writer is director – Fixed Income at Invesco