Written by Cormac Nevin.
After quite a challenging year to date for both equity and fixed income assets, last week saw a strong risk rally. The S&P 500 Index of US Equities led the charge and rallied +5.3% in GBP terms. Global, Continental European and UK Equities also had a good week, while the riskiest forms of fixed income such as high yield bonds also rallied. High-quality global bonds, as measured by the Bloomberg Global Aggregate Index GBP Hedged, also rallied slightly last week.
This is interesting as it illustrates the continuations of a phenomenon that we have witnessed this year as the performance of equities and high-quality treasury bonds have started to move in the same direction as inflation, and higher interest rates prove to be a challenging environment for both. The MSCI All Country World Index of global equities is now down -6.4% for the year in GBP terms while the Bloomberg Global Aggregate Index GBP Hedged is also down -7.3% for the year. Naïve allocations to treasuries and equities have formed the basis of traditional multi-asset investment over the last three decades, and a reversal of the negative correlation between the two variables could have interesting ramifications.
Many of our portfolio components such as specialist global value equities, Chinese government bonds and Absolute Return strategies have generated positive absolute returns this year as equity and fixed income markets fell. Once again this illustrates the importance of a diversified portfolio which goes beyond traditional stocks & bonds, particularly in the changing macroeconomic landscape we currently face.