Welcome to Plan First Wealth’s Q3 2022 Market Review. We will review what happened in the economy and how it directly impacts those from the UK and then dive into the global impact.
After writing a version of these quarterly reviews for 7 years, I’ve identified two common themes I see over and over.
1. We jump from crisis to crisis.
2. We get through it in the end.
Right, let’s wind up this quarter’s review, yes there’s a crisis, but this too shall pass. Mic drop…
No, no, I won’t stop.
I had a feeling I only get once every couple of years this quarter, and I want to tell you about it. More on that later.
First, as always, let’s look at market returns over the quarter.
Quarter 2, 2022 By the Numbers
Global equities, as measured by the MSCI All Country World Index (USD) fell by 7.74% over the quarter, and now sit at -26.03% for the year.
Within the bond world, the Bloomberg Barclays Global Aggregate (USD), which is an index comprised of global fixed income; government bonds, corporate bonds, other asset back securities; mortgages, and car loans was -7.4% over the quarter, and now sits at -20.3% YTD.
To borrow a phrase from my last review, there’s nowhere to hide in the investing world today. Commodities are the only main sector with positive returns YTD, however, we don’t recommend trusting large parts of your investments to a sector renowned for huge cyclical booms and busts.
While the downturn in both stocks and bonds this year has been painful, there is an upside: Lower valuations and higher yields mean that expected returns are now higher.
The dollar continues its path of strengthening against most global currencies, most notably GBP – more on that to come.
With global central banks raising interest rates – which increases the costs of borrowing – to try and tame inflation and slow the economy down, it’s no wonder the global equity and bond markets are falling. However, have we hit the bottom? Are we in a recession?
Q3 2022 Market Review: WTF Happened in the UK
We had the death of the Queen, a very sad moment for the UK, a figurehead of the country, she’ll be missed by many.
In rolls a new prime minister for Britain in Q3, and she landed with bang ! The mini-budget was in fact a maxi-budget and GBP fell to the lowest level ever against the dollar.
In a post-Brexit world it’s easy to forget the importance of the UK in the global economy.
But the UK is the sixth biggest economy in the world. It’s the HQ of some of the biggest companies in the world. It has one of the world’s strongest currencies and London constantly jostles with New York to be the financial centre of the world.
On Friday September 23rd I welcomed that odd feeling. As I scrolled through the latest financial news and then onto a live FX website, I was watching was GBP crater to $1.04. I was genuinely worried about what this would mean for the UK. Not to mention the concerns I anticipated from our British clients in the USA, with everyone at least having some exposure to GBP in the form of their UK state pension (and often other assets).
The maxi-budget was the precursor to this currency fall, with huge tax cuts and spending that can only be bank funded by printing more GBP, Sterling fell and kept falling as more GBP in circulation means your pounds are worth less. And this could cause more inflation, after all inflation has been the by-product of similar stimulant policies throughout the pandemic, meaning higher and higher interest rates, and a real economic slowdown or deep recession in the UK.
The knock-on effect caused UK bond prices to fall, and boy did they fall. So much so, that UK pension funds (the type of funds that pay defined benefit pensions) had to call the Bank of England to rescue them from immediate insolvency – this is not 2008, but the franticness of the bailouts has an air of ‘08 about them.
This budget has to be chalked down at best as a naïve economic stewardship for the chancellor and the new PM. There was clearly a lack of communication between 10 Downing Street and the financial sector/ Bank of England.
How this plays out for the UK, we’ll wait and see. The policies are optimistic, bullish and prosperous, but they risk sending the UK into further debt, higher taxes, weaker GBP.
Inflation and Recession in Q3 2022
Back over the pond, to marginally calmer waters in the USA.
The Fed is intent on raising interest rates to slow economic growth in the hope of taming inflation. With borrowing becoming more expensive, coupled with these rate rises being quicker than ever, the stock market and the bond market are not happy.
The dollar is incredibly strong against most global currencies. This makes imports cheap (good for bringing down inflation), but exports and onshoring US corporations expensive. A strong dollar is also bad news for emerging countries as oil and wheat are priced in USD and more expensive, and a lot of emerging markets borrow in USD to raise capital.
We’ve seen the housing market slow with new mortgage rates now over 6%. However, 95% of the housing market is on long term fixed mortgages so the increased cost of borrowing is not impacting the majority of US homeowners.
Wages are rising by an average of 4%-5% a year Vs inflation in the US of between 8%-9%. With a fully employed workforce this is keeping the US’s consumer market ticking over, people still have money to spend each month, and although there’s a squeeze, people are spending. This is good for the stock market as revenues are holding firm, however, bad for inflation as this is taking supply out of the market, and with less supply that causes more inflation.
We’re on the precipice at the moment. There’s still a lot of positives in the broader economy and we may have reached the bottom, but there’s cracks beginning to show; the slowdown is real, hiring freezes are being whispered, consumer confidence is down, and more businesses are pausing new infrastructure spending.
What we know is the bottom of the market comes way before the news gets better. You don’t have to look back far to see this. On March 23rd, 2020 the stock market bottomed out. That was just the first few weeks into the pandemic. Those who stayed invested and/or purchased in the flash sale were richly rewarded for their faith.
Q3 2022 Market Review: the Rest of the World
Today’s economy is so intertwined, that we cannot forget what else is happening in the world. China is experiencing an economic slowdown; little inflation and they’re lowering interest rates to stimulate the economy. With a zero-COVID policy this is causing supply chain problems globally and yes, you guessed it, inflationary pressures. China is also experiencing a property problem, too much property supply, overleveraged businesses typified by the news earlier this week with Evergrande.
The tragic war in Europe is causing humanitarian despair for the people involved. The West is cutting off its reliance on Russia, whilst supporting Ukraine economically, politically and with military aid. The economic impact for Europe is higher prices. The EU economy is slowing, inflation keeps ticking up, the European Central Bank is raising interest rates for the first time in 10 years and the base case is that the EU enters a recession next year.
Quarter 4 will be story of optimism and pessimism lead by inflation data, employment numbers, earnings season, the Fed’s interest rate response and any further tension in Europe. Or of course, anything else that hasn’t yet happened but will.
Plan First Wealth Managing Money
At PFW our portfolios are characterized by massive global diversification across geography and asset classes. We invest in equity mainly via passive index funds, construct our portfolios with cost in mind, and design our portfolios and your investment plan to hold up in good times, and in bad.
We have 9 risk-adjusted strategies, TR1 is number 6 of 9 (1 = low risk, 9 = high risk).
Total Return I USD (TR1) – For US-domiciled funds
Where is this invested?
- 61% in global developed market equities and bonds, mostly held in tracker (ETF) funds.
- 36% in global government and corporate investment grade bonds and debt
- 3% in cash.
Q3 2022 performance of Total Return I USD = -5.12%*
YTD 2022 performance of Total Return I USD = -18.99%*
1-year performance of Total Return I USD = -16.39%* (October 1 2021 to September 30 2022)
*Past performance is not an indicator for future return. The return is net of a management fee of 1.25%. This does not include any trading fees.
This portfolio is outperforming over the quarter by +0.25% an equal weighted portfolio made up of global equities and global fixed income, also known as the portfolio’s benchmark.
We can attribute that to the PIMCO Global Bond Opportunity Fund (PGBIX) that is held in this portfolio. This is an actively managed bond fund, which has less interest rate sensitivity due to the shorter duration of the bonds it holds. This counterbalance to the lower duration is lower dividend distributions (yield) however, that’s proving to be a prudent strategy given interest rate policy today.
The global equities held within the portfolio are struggling with the same market dynamics of a strong USD impacting foreign earned income. US equities are tracking the broad US equity market.
The best equity performer in the portfolio is the VanEck MOAT ETF. This position holds companies that have a long-term competitive advantages, based on Warren Buffets ‘Economic Moats’ concept. The companies have fared better in the current climate along with the equal-weighted allocation of the fund has meant less concentrated exposure to FAANG stocks.
General Principles to Investing
Our ‘General Principles’ to investing;
- You and I are long-term, goal-focused, planning-driven equity investors. We’ve found that the best course for us is to formulate a financial plan—and to build portfolios—based not on a view of the economy or the markets, but on our most important lifetime financial goals.
- Since 1960, the Standard & Poor’s 500-Stock Index has appreciated approximately 70 times; the cash dividend of the Index has gone up about 30 times. Over the same period, the Consumer Price Index has increased by a factor of nine. At least historically, then, mainstream equities have functioned as an extremely efficient hedge against long-term inflation and a generator of real wealth over time. We believe this is more likely than not to continue in the long run, hence our investment policy of owning successful companies rather than lending to them.
- We believe that acting continuously on a rational plan—as distinctly opposed to reacting to current events—offers us the best chance for long-term investment success. Simply stated: unless our goals change, we see little reason to alter our financial plan. And if our portfolio is well-suited to that plan, we don’t often make significant changes to that, either.
- We don’t believe the economy can be consistently forecast, nor the markets consistently timed. We’re therefore convinced that the most reliable way to capture the long-term return of equities is to ride out their frequent but ultimately temporary declines (“The key to making money in stocks is to not get scared out of them” Peter Lynch).
- The news cycle reinforces uncertainty. We believe that uncertainty – in the markets and indeed the World – is the only certainty. We don’t seem to move from periods of uncertainty to periods of certainty; rather we move from one uncertainty to the next. Thus, we encourage our clients to embrace “rationality under uncertainty.”
- The performance of our equity portfolios relative to their benchmark(s) is irrelevant to investment success as we define it. (It is also a variable over which we ultimately have no control.) The only benchmark we care about is the one that indicates whether you are on track to achieve your financial goals.
If you want to find out more, join us on Facebook in our WealthHub where we share much more frequently about current events and how they may or may not impact Brits in America.
Plan First Wealth is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.