INVESTMENT STRATEGY UPDATE
Taking Stock
Myles Zyblock
B.A. (Hons.) M.A., CFA
Chief Investment Strategist
When stocks encountered significant performance headwinds over the last half-century, bond holdings could be relied on to provide portfolio ballast. This dependable combination is one of the factors that has made the basic stock-bond asset mix the foundation of modern portfolio construction. However, this year's extraordinary turn of events, in which both equities and bonds have lost value, has called into doubt the merits of a standard asset mix.
Bonds and stocks faced a starting point problem. More than $11 trillion dollars of bonds were trading with a negative yield to maturity while global bond benchmarks were offering a paltry 1.3% yield by the end of 2021. Stocks were also carrying some of the richest valuation multiples recorded in over 100 years. The normalized price-earnings ratio for global equities hit 29 by late 2021, a mere 3 turns lower than what was seen at the height of the 2000 equity bubble. Performance vulnerabilities were palpable for these major asset classes.
Total Returns for Global Stocks, Bonds,
Commodities, Liquid Alternatives – 2022
Source: 1832 Asset Mgmt, Bloomberg
Accelerating worldwide consumer price inflation provided the impetus for an asset valuation re-rating. The inflationary explosion that drove inflation from 1.5% to 5% in 2021 was first considered a "transitory" event that would swiftly stabilize as the global economy responded to the initial stresses created by the pandemic. Investors were willing to give these authorities the benefit of the doubt. But all of that began to change when Federal Reserve Chair Powell opted to eliminate the term "transitory" when referring to inflation in late November 2021. This was interpreted as indication that the inflationary issues had a longer shelf life than previously indicated.
Shortly thereafter, the world’s major central banks began to raise interest rates. The authorities, with inflation continuing to climb far above official targets, have turned increasingly aggressive in their monetary tightening campaigns. The rising interest rate environment has placed downward pressure on equity valuation multiples by lowering the present value of future corporate cash flows. These higher interest rates have also helped to push bond yields higher and, by definition, bond prices lower. It has been a perfect storm for investors with exposure only to stocks and bonds.
Long-term investment success necessitates the creation of a portfolio that is prepared for a variety of economic and financial market eventualities. Forecasting the future with any useful precision is nearly impossible. Inflation may continue elevated for years to come as a result of the rising costs associated with the onshoring and reshoring of production, prolonged trade conflicts, or geopolitical strife. Or, perhaps, the ceaseless forces of innovation and an ageing demographic re-assert themselves, placing inflation back on a downward path. We simply cannot be certain. Diversification acknowledges that the future is unknowable, despite the fact that its portfolio benefits are well established. Typically, it is contextualised throughout the stock-bond domain to include geographies, styles, duration, and credit quality. While those are important considerations, a broader perspective is required, which includes real assets, private markets, and other alternative investments.
B.A. (Hons.) M.A., CFA
Chief Investment Strategist
Myles Zyblock is a recognized strategist in North America, regarded for his investment insights that blend the tools of finance and psychology in order to capture major inflection points in financial markets. He has over 20 years of experience in guiding and advising on asset allocation for a diverse set of institutional and retail advisors across North America, Europe and Asia.
Myles joined Dynamic Funds in 2013 as Chief Investment Strategist, working closely with the Dynamic Funds portfolio management team. His experience spans across multiple asset classes and geographic regions. Myles is also the Portfolio Manager of Dynamic U.S. Sector Focus Class and Dynamic Global All-Terrain Fund, which are Dynamic’s first rules-based offerings.
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