By Gary Lucas
It’s common for financial markets to hit a stumbling block and start to climb a wall of worry. However, we’re currently seeing several significant factors that are weighing on markets and leading to losses.
That said, it’s essential to be clear that when you’re managing portfolios, there will always be concerns and things to worry about. Nonetheless, the issues we’re seeing at the moment are more extreme than usual.
Five key factors are currently affecting the world and the financial markets:
– The pandemic continues, and China’s response is a concern
– The war in Ukraine and the threat of an expansion
– Rising inflation
– Fear of a recession
– Increasing interest rates
The last entry on the list remains the most significant from a financial perspective. Rising interest rates are always a threat as they increase costs to governments, businesses and households. Moreover, rising costs create a knock-on effect, and can lead to a reduction in economic growth, and job losses.
As an aside, the election in Australia, while a contributing factor, is a standard wall of worry item and isn’t as important as the other points listed above.
What has been the impact on financial markets?
Last year, most markets reached record levels or close to it. In contrast, the first part of 2022 has seen losses.
Some of the losses that have occurred between 1st January and 30th April include:
- US S&P 500 (the largest 500 companies) -13.75%
- US NASDAQ (US listed technology companies) -22.36%
- MSCI World Index (global 100 biggest companies) -13.14%
The Australian share market was around breakeven for the same period but has since turned negative in May.
How has Clearwater performed over the same period after fees?
DMG Diversified Portfolio -6.12%
Clearwater Dynamic Portfolio -6.79%
While we would like to see better results, our approach, which focuses on limiting losses against the main markets and other managers, is important. We are pleased to have delivered on this and will keep striving to limit losses as much as practical while still being positioned for the inevitable recovery.
At the same time, our long-term numbers continue to hold up during this challenging period.
We’ll continue to make adjustments within the portfolio by reducing, exiting or adding managers, because we know from experience that remaining invested has proven to be the best strategy.
That’s not to say all our investments have suffered. On the contrary, we have holdings that continue to perform well during this difficult period and have returned 6, 8 or even 10% over the last year. Furthermore, these returns are helping to reduce the losses we’re currently experiencing on shares.
Our current approach and long-term objectives
It’s worth restating the objectives of our portfolios.
DMG Diversified Portfolio
Our objective is to achieve returns of 4% p.a. above the cash rate, after fees, over rolling 5-year periods.
Importantly, the cash rate increased from 0.1% to 0.35% last week. This predicted increase received significant air time at the start of the election campaign, and we expect to see further increases over the coming months.
We also aim to reduce, but not eliminate, the losses and manage the volatility usually experienced in financial markets. Consequently, we’re currently repositioning investments to further improve our long-term returns, and reduce volatility.
Clearwater Dynamic Portfolio
Our objective is to achieve returns of 6% p.a. above the cash rate, after fees, over rolling 10-year periods.
The CDP is more volatile than the DMG, but it will add more value over the long term. As a result, the holdings in our portfolio are targeting returns that will enable us to exceed our target.
We’re gradually investing in more growth assets, meeting regularly to discuss our investment strategy. When an asset class or sector suffers a loss, we use this as an opportunity to add to our position at a lower price.
What lies ahead?
We acknowledge that getting predictions correct consistently is bordering on the impossible. Central banks have a vast team of people working full-time on economic forecasts, yet even with access to mountains of data, they still fail to get things right. Indeed, even Phillip Lowe, the head of our Reserve Bank, got the date of the first interest rate rise completely wrong.
Predicting economic trends and financial markets is not easy at the best of times, as each of the five factors on the list above is unpredictable. However, each issue will diminish or pass at some point, and the financial markets will recover.
If history is a guide, the recovery will be strong and swift. Meanwhile, we’ll continue to work on finding the balance between limiting the losses and positioning our portfolios to benefit from the inevitable recovery.