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Top of mind -

Have we reached the bottom and what does that mean for investments?

The Arbuthnot Latham Investment Committee (IC) met in October to take stock of the global macroeconomic environment and our portfolio positioning.

Heading into this quarterly IC series, client portfolios were defensively positioned - we were underweight bonds and equities and overweight cash and defensive alternatives in our active portfolios. A key driver of negative performance in both debt and equity this year has been global interest rate rises in the face of generationally high inflation. This coupled with high valuations and slower global growth accelerated the downturn.

Have we reached the bottom?

Through our analysis, we believe inflation is starting to peak globally and economic growth is approaching the trough. These signs are tentative, but if inflation is indeed peaking, central banks will likely slow the pace of rate increases in 2023.

We expect equity markets to bottom close to, or possibly before, inflation tops and economic growth bottoms out. These developments, combined with low valuations compared to the start of 2022, warrant reducing our underweight position in both equities and fixed income and moderately increasing risk across our portfolios.

Portfolios will remain defensively positioned and broadly diversified—we acknowledge there are some signs inflation is peaking, but the outlook remains murky.

It is possible central banks will continue raising interest rates longer than expected, which will likely weigh on economic growth and, if they are too aggressive, possibly lead to a deeper recession than expected. However, the low equity and fixed income valuations simply cannot be ignored. Low valuations reduce the risk of permanent capital loss, and we feel this justifies adding risk in a structured manner in line with clients’ risk appetites.

Timing the bottom of the market is nearly impossible. However, given the sharp drawdowns markets have experienced this year, we believe adding some risk to core assets will benefit clients’ long-term returns.

Our response

Here are some of the key decisions to come out of our latest IC series:

How are portfolios changing

 

Asset class Movement Reason
Government and corporate debt Increase exposure to neutral weight Attractive yields for relatively low risk.
Global Equities Increase exposure though remain underweight Valuations are starting to look attractive long-term, and outright cheap in some cases.
Global direct commercial property Exit exposure completely Our global commercial property is now yielding less than low risk debt markets.
Commodities Halve exposure though retain off benchmark position Commodity markets struggle when global economies contract. We believe there are better opportunities elsewhere.

What does the future hold?

There are several scenarios that may play out and it is very likely the remainder of the year will remain volatile.

Equity and bond markets may fall further, which means we were slightly early in adding risk. But this possibly may provide us with a better opportunity to increase risk further at even lower valuations, as we still retain a lot of liquidity for future attractive opportunities.

The other possibility is that the risks we are concerned with today abate slightly, which means global markets recover more quickly. By adding risk in a slow and structured manner when prices are depressed, we can capture the opportunity set the market turmoil has presented.

This document is provided for information purposes only. It does not constitute advice, a solicitation, recommendation or an offer to buy or sell any investment, banking or lending product or service.

The contents of this document are based on opinions or conditions as at the date of writing and may change without notice. To the extent permitted by law or regulation, no warranty of accuracy or completeness of this information is given, and no liability is accepted for its use or reliance on it.

 

Find out more about our Investment Management team

Author -

Pete Doherty

Peter Doherty

Head of Investment Research

As Head of Research, Peter is part of the senior tactical asset allocation committee at Arbuthnot Latham, and supports research efforts across all major asset classes. Pete has particular expertise in alternative assets.

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Suzy Waite

Investment Writer, Arbuthnot Latham

Suzy joined Arbuthnot Latham in 2021 from Bloomberg. An experienced financial journalist, she previously worked at Euromoney Institutional Investor and Haymarket Media. She’s covered a variety of areas including hedge funds, commodities, equity capital markets and asset management while living in New York, London and Hong Kong.

Working closely with the Investment Committee, Suzy covers committee meetings, client events and writes macro thematic pieces. She also contributes to flagship campaigns.