Q4 2022 Investment Update…
12 January 2023
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Hello and welcome to our Q4 2022 investment update. My name’s Jordan Gillies and I’m one of the partners here at Saltus, and I’m once again joined by Michael Stimpson from our investment management team. With any Q4 update that we do, we do a little bit of a review of the whole previous year, and what a year it’s been! It’s certainly been a painful one as far as markets are concerned, and it’s been really testing for people as well towards the end of the year too. We had the budget to end all budgets and mortgage rates are really starting to hit people in their pockets now. But, at the same time, we saw inflation peak and December perhaps felt a little bit calmer. But is it the calm before the storm?
So, Mike, I suppose what would be really, really helpful before we dive into what we’ve been doing in portfolios and what our outlook is for 2023, if you could just give us a bit of a recap as to the previous year and the last quarter in particular?
Sure. I think 2022 was really the year of things that we knew were going to happen happening, but still catching people off guard. And by that what I mean is, sitting here a year ago, we knew that rising inflation was going to cause rising interest rates and that was going to affect markets. What we didn’t anticipate was for these themes to be turbocharged by the energy shock caused by the Russian invasion. And really Q4, but 2022 as a whole, is a story of markets adjusting, often badly, to this regime change, this change from a world of low inflation and low interest rates to one of higher inflation and higher interest rates.
And in this context, Q4, the fourth quarter, was actually a period of relative calm compared to what we had before. But as we sit here today, there’s a bit of an ominous feeling around investors, feeling that the worst may yet still be to come. We haven’t had a recession yet and the three pillars of the global economy all have problems. In the US, they have higher interest rates and they’re deliberately trying to slow down their economy. In Europe, we obviously have the war. In China, the property crisis is not at an end. And so there really isn’t a great outlook for growth.
And so, in some respects, it feels like we’ve got a huge amount to come this year, and last year in itself was challenging enough. So, what did we actually do in portfolios last year and how are we positioned for what’s to come?
I think the big call that we’ve made in portfolios is that right now we haven’t yet seen the time to increase risk. So, portfolios are continuing to run roughly 10% below their risk budgets. But, having said that, we have been quite active in portfolios with quite a lot of what we refer to as common sense housekeeping. So, unusually for Saltus, we’ve shifted away from alternatives slightly in favour of government bonds. After a brutal selloff in government bonds, they make more attractive investments now. Short-term US treasuries offer yields above 4%, US TIPS, which are inflation-proof bonds, have positive real yields so they can offer you a positive return after inflation. And these are attractive investments in the current climate, particularly as they offer you the chance of diversification should we see more difficult times for equity markets.
And Mike, just on that point, how do you feel about that? Because, really, our strong allocation and expertise in alternatives was what saw some relative outperformance compared to our peers last year and got us very much through the storm. So, that’s quite a big change and a big shift for us. Does that bring some nervousness, or do you think that’s just doing the right thing at the right time?
I think it’s a good question but, Jordan, in this environment we have to continue to stay nimble. We’ve sold our convertible arbitrage strategy, which did so well last year, but really there’s been profit-taking across the board of things that have held up well and, right now, we’re quite keen to reduce complexity in portfolios. And the fact that we’re reducing alternatives at the moment, that doesn’t mean that will be the case forever. So, for example, you’ll remember at the beginning of last year we had high weightings to commodities as we expected inflation to rise and, in the middle of the year after they’d done well, we cut those exposures right back but, actually, we started to add to those commodity weightings again following their falls. And that’s just a good example of our investment management process being more nimble, being able to react more quickly, and we think that’s really important in the current environment.
Okay. So, remaining nimble and reactive really is going to be key for this year. But then, a million-dollar question, Mike, if you get this one right, you’re a genius as far as everyone’s concerned. So, no pressure. What do we think the outlook is for 2023 from an investment perspective for our clients? Should everyone… it feels like people should be concerned, is that the case? How do we think it’s going to play out?
I think there are positives and minuses as we move into 2023. 2022 was difficult in markets but, actually, in economies, we haven’t seen any big earnings downgrades, we haven’t seen many profit warnings, we haven’t seen a recession, we haven’t seen the end to the war in Ukraine, we haven’t seen the end of the property crisis in China. So really, there’s lots still to come.
But isn’t that in itself a little bit nerve-racking? Because obviously you said we haven’t felt that much pain in economies, but world equities last year were down 17%, world bonds were down 12.5%. So, investors definitely felt pain last year.
Sure. For markets, yes, it was difficult and in your Saltus portfolios you’ve seen falls in 2022 of between 4% and 10%, depending on your risk profile and strategy. We’re not in the business of losing money, it’s always frustrating to show losses but, in the scheme of things, given your risk profile, that’s a fall that’s very much run of the mill. And when you consider all the things that are going on, you can’t help feeling that there might be more to come.
Having said that, we have got some green shoots as well. Over the last six months, you and I have sat here and talked about the most important thing we have to see is inflation starting to come down, and we’re starting to see that. We’ve had two consecutive months of headline inflation numbers falling, which is great, but there’s still a mismatch between what the Federal Reserve think it’s going to take for inflation to continue to come down and what the bond market is saying they think it will take for inflation to come down. And we’ve had that mismatch a couple of times in 2022, and both times it ended badly for markets. That’s not to say that the bond market won’t be right this time, but it just means we need to tread carefully.
Okay. So, do we think then we’re going to add risk at some point early this year, or is it just too difficult for you to say that at the moment?
I think it’s early to say, but what we would say is that, with inflation starting to come down, that is the most important trend, and we can start to see the beginning of the end, as it were. And if this were to continue, as we said, we’ve got lots of liquidity in portfolios, the portfolios are under their risk budgets, and we’ll be prepared to move quite quickly when we think that opportunity is right. And so, while we think there may be some more pain to come, we are looking for that opportunity and, at some stage in 2023, we do think it will be the right time to add risk to portfolios.
Perfect. All right. Thank you for that summary, Mike. Brilliant. Well, look, thank you so much for joining us. We appreciate it’s a slightly nerve-racking time so, as always, do feel free to get in touch with your adviser if you’d like any more information, or to speak with any of the investment team directly. And we’ll see you again at our next quarterly update.
Thanks very much.
All authors have considerable industry expertise and specific knowledge on any given topic. All pieces are reviewed by an additional qualified financial specialist to ensure objectivity and accuracy to the best of our ability. All reviewer’s qualifications are from leading industry bodies. Where possible we use primary sources to support our work. These can include white papers, government sources and data, original reports and interviews or articles from other industry experts. We also reference research from other reputable financial planning and investment management firms where appropriate.
The views expressed in this article are those of the Saltus Asset Management team. These typically relate to the core Saltus portfolios. We aim to implement our views across all Saltus strategies, but we must work within each portfolio’s specific objectives and restrictions. This means our views can be implemented more comprehensively in some mandates than others. If your funds are not within a Saltus portfolio and you would like more information, please get in touch with your adviser. Saltus Asset Management is a trading name of Saltus Partners LLP which is authorised and regulated by the Financial Conduct Authority. Information is correct to the best of our understanding as at the date of publication. Nothing within this content is intended as, or can be relied upon, as financial advice. Capital is at risk. You may get back less than you invested. Tax rules may change and the value of tax reliefs depends on your individual circumstances.
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