When the FED tightens, there is (almost) no place to hide
So far, 2022 has been a tough year with many headwinds in capital markets: Russian invasion of Ukraine, new Covid cases in China bringing partial lockdowns, increasing energy and food prices, rising inflation, etc… but, if we had to just name one, we would say that the FED tightening process is the most consequential. The old sentence “Don’t fight the FED” has never been so true. During the last 4.5 months, the FED has increased its official rate from 0.25% in mid- March to 2.5%.
TRADITIONAL ASSET CLASSES:
- EQUITIES: High valuations, higher discount rates and lower expected economic growth have made equities lose USD19 trillion in 7 months to deliver a -12.9% High growth stocks with demanding valuations were the most vulnerable.
- BONDS: All bond prices have adjusted to the new reality after the FED hiked rates. Unfortunately, bonds and equities became highly correlated again and the world bond aggregate lost 6.7%, which is a very important loss for an asset class that is also known as “fixed” income.
- REFERENCE TRADITIONAL BENCHMARK: 60% EQUITIES + 40% BONDS: This popular reference index has lost 10.4% during the year.
Was there any hope in the alternative asset classes to compensate for the poor performance in the traditional portfolios? Not much:
- HEDGE FUNDS. We used the daily index, as the most common indexes are still not available as of 31 July. At least the -4.5% returns did not look that bad, although there were large differences between the more conservative ones (relative value, macro, arbitrage, etc) – which were slightly negative – and the long/short, who did not perform well, specially because they continued with a growth bias.
- PRIVATE EQUITY: Its returns are not available yet, so we took as proxy the Index with the listed private equity companies. As private equity is “somehow” a leveraged version of public equities, the proxy we are using posted a -22.0% Venture Capital suffered more than others with the fall of growth stocks.
- REAL ESTATE: Its returns are not available yet, so we took as proxy the FTSE EPRA Nareit Global REITS Net Tax in USD. Real Estate is obviously sensitive to interest rates also and this market took a hit of 13.7%.
- The only bright spot with a +35.3% performance. Interestingly, the energy subindex is the only one that was positive, as Agriculture, Industrial Metals and Precious Metals were flat or negative. Oil and Natural Gas were also going up before the Ukrainian conflict, and the invasion exacerbated the market.
- BITCOIN: The whole crypto market has gone from a USD 3 trillion market to about USD 1 trillion. Despite the different drivers of this market, it has finally become highly correlated with risky assets (Nasdaq) and has tumbled 48.6%.
- GOLD: Traditionally a good hedge against inflation, it has not been the case this year, although we may say that -3.5% is a decent performance compared to other assets performance.
Unfortunately, we have seen that only energy has produced positive returns this year, and the rest of the assets had negative or very negative returns. Investors still have 5 months to recover these losses, navigating in an environment that does not provide too much diversification.
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