Portfolios Under Pressure – Midyear 2022

Market strategists discuss trends in portfolios, market opportunities, and the likelihood of recession in the second half of 2022.

The Natixis Investment Managers Portfolio Barometer offers insights into Latin American & US Offshore financial advisors’ model portfolios and the allocation decisions they are making. Our team of dedicated consultants works directly with financial advisors and other intermediaries to analyze and enhance their understanding of the sources of risk, return and diversification in their portfolios. This report examines trends in the markets and in advisors’ moderate model portfolios in the first half of 2022 and also presents highlights from our semiannual market strategists survey.

Market Recap: 60/40 Portfolios Under Pressure
While investors entered 2022 fully aware that higher inflation and the end of Quantitative Easing (QE) were looming on the horizon, the suddenness and magnitude of rising long-term interest rates still came as a shock. Growing volatility and risk across all asset classes led Latin American and US Offshore investors to take a “wait and see” attitude, largely echoing the behavior of wealth managers worldwide.

Financial market conditions during first six months of 2022 have been extraordinary by almost any measure:
  • Equities dipped into bear market territory, but fixed income holdings didn’t offer much relief.
  • Losses on Government bonds year-to-date were in the double digits, with the Barclays Global Treasuries index down -13.91% and the Barclays US Aggregate down -10.35%.
  • This high correlation between stocks and bonds was especially difficult as Treasuries are considered a prudent investment generally used to cushion equity performance in investors’ portfolios.
  • One of the few bright spots has been non-directional strategies, particularly managed futures, that offer a safe harbor to investors, delivering positive returns and un-correlated performance.
  • Market conditions certainly affected the performance of US Offshore and Latin American portfolios, but also had a significant impact on their risk and diversification.
It is fair to say that this year’s financial environment challenges the foundations of the 60-40 portfolio construction model (Figure 1). With the notable exception of the US dollar and certain alternative strategies, there has been virtually no place to hide in the markets since the beginning of the year. In addition to bonds and equities re-correlating to each other (which is typical of inflationary environment), segments of the equity markets also re-correlated to each other. Even defensive holdings such as high dividend and low volatility stocks, often considered “bond proxies”, incurred losses, albeit less pronounced than the broader stock indexes.

Figure 1 – First half 2022 performance challenges 60/40 portfolio model
(January 1 – June 30, 2022)

Barclays Global Treasuries -14.82%
Barclays Global Aggregate -9.06%
Barclays US Aggregate -10.35%
MSCI EAFE -19.57%
S&P 500® -19.96%
MSCI Europe -21.97%
Low Volatility (SPLV) -8.69%
Dividend Yielder (DVY) -2.75%
EurekaHedge CTA Managed Futures Index -7.49%
60% MSCI EAFE/40% Barclays Global Aggregate -15.93%
Average Latin American/US Offshore Model -15.60%
Morningstar Moderate Target Risk NR USD -15.91%

Source: Barclays, MSCI, Natixis Investment Managers Solutions


Portfolio Trends: Volatility, Risk, and Tactical Allocations
As a result of the market turmoil in the first half, the 3-month volatility of the typical Latin American/US Offshore model portfolio doubled from 6% at the end of December 2021 to more than 12% as of June 30, 2022, assuming monthly portfolio re-balancing. While volatility was certainly higher at the start of the Covid pandemic, the increase in risk is one of the fastest observed (Figure 2) but even so, performance in the model portfolios held up fairly well:
  • The average portfolio lost 15.6% year to date, impressive resilience under such adverse market conditions.
  • More specifically, the equity bucket lost 20.7% on average, fixed income lost 11%, and multi-asset lost 14.9%.
  • In contrast, while their allocations were small, real assets were much more resilient, and their average allocation increased from 0.7% to 1.1% relative to the other asset classes.

Figure 2 - Average portfolio volatility doubled in the first half of 2022
(3-month rolling risk (%), April 2, 2019–June 30, 2022)

financial advisors react figure 2

Most of the re-allocation we’ve observed in the portfolios was marginal, but included:
  • Modest inflows to liquid alternative strategies (CTA/Managed Futures, Relative Value and Long/Short Credit)
  • In equities, some flows to select emerging markets (primarily commodity exporting countries) as well as a rotation from growth to value, notably healthcare and energy sectors
  • On the fixed Income front, “Cash is King” seems to be the motto, with increased tactical allocation to cash and short-dated credit both to dampen risk and be positioned for a turnaround in risk assets
  • Some outflows from long-duration sovereign bonds, investment grade credit, and emerging market debt, as well as tech stocks on the equity front
Beyond inflation, the fear of a recession seems to be a growing concern for Latin American and US Offshore investors. There is also some hope that we may be reaching a high-water mark for sovereign rates and could start to see a rotation back to growth and tech stocks which benefitted from the low growth environment of the 2010s.

Strategists Cite Inflation as Key Risk but Expect Markets to Stabilize
Recession is just one of the topics covered in the most recent Natixis Strategist Outlook.1 One quarter (24%) believe recession is inevitable in the second half of 2022 while another 65% see it as a distinct possibility. Other findings include:
  • Nine out of 10 respondents believe that central bank policy will be the biggest market driver over the next six months.
  • Similarly, 7 in 10 rank inflation as the biggest market risk in H2 – although less than one in four believe inflation will remain persistently high.
  • The strategists see energy prices (76%), food prices (64%), and wage hikes (61%) as the top three drivers of inflation.
  • Almost 6 in 10 (58%) believe value will continue to outperform growth for at least a few more months, while nearly one-quarter (24%) think value will be on top for a few more years.
  • Investors looking for upside potential in the second half will most likely find it in the US (44%), China (41%), Europe (29%) and Latin America (15%).
Although volatility and uncertainty characterized the first half of 2022, 74% of the strategists believe the worst pain is over, and while markets are not likely to make a full recovery by December, they will stabilize. Portfolio Manager and Lead Portfolio Strategist Jack Janasiewicz takes it a step further. He cautions against getting too bearish, because so much of the bad news is already priced into the markets. He points out that as of July 1 “energy prices have dropped sharply providing some relief at the gas pump. And we are hearing that food suppliers are sitting on mounds of inventory as well, which means food prices may be set to begin slipping too. We could be on the precipice of seeing both of these inputs come down sharply.”
Methodology
All figures, unless otherwise stated, are derived from detailed analysis conducted by the portfolio consultants at Natixis Investment Managers. This edition of the Portfolio Barometer highlights trends and observations uncovered by analysis of 32 model risk-rated portfolios managed by Latin American & US Offshore financial advisors and wealth management firms in the six months ending December 31, 2021 as well as 38 risk-rated model portfolios managed by Latin American & US Offshore financial advisors and wealth management firms in the six months ending June 30, 2022. The model portfolios under review were defined as Moderate Risk by the firms submitting them. All statistics in this report are based on returns of advisors’ current model portfolios over the three years ending December 31, 2021. These statistics are therefore representative, rather than actual historical figures. The dedicated consulting team collects portfolio data and aggregates it in accordance with the peer group portfolio category that is assigned to an individual portfolio by the investment professionals. When professionals request a report, they categorize the portfolios as belonging to one of the following categories: Aggressive, Moderately Aggressive, Moderate, Moderately Conservative, or Conservative. The categorization of individual portfolios is not determined by Natixis, as our role is solely as an aggregator of the pre-categorized portfolios. The Dow Jones Moderate Portfolio Index is used as the benchmark for the Latin American & US Offshore moderate peer group average due to its similar risk profile and investment universe as the peer group. Please note that risk attributes of portfolios will change over time due to movements in the capital markets. Portfolio allocations provided to Natixis are static in nature, and subsequent changes in an investment professional’s portfolio allocations may not be reflected in the current data.

1 The Natixis Strategist Outlook is based on responses from 34 experts including 27 representatives from 14 affiliated asset managers, 3 representatives from Natixis Investment Managers, and 4 representatives from Natixis Corporate & Investment Banking.

Past performance is no guarantee of, and not necessarily indicative of, future results.

All investing involves risk, including the risk of loss. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.

The analyses and opinions referenced herein represent the subjective views of the author as referenced, and are as of August 8, 2022. These, as well as the portfolio holdings and characteristics shown, are subject to change. There can be no assurance that developments will transpire as may be forecasted in this material. 

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