The bear continues to growl

While there was some late summer positive momentum across the markets during this quarter marked by heightened volatility, interest rate increases by Central Banks and the U.S. Federal Reserve and persistently high inflation numbers reversed the rally and pushed markets deeper into negative territory.

The S&P 500 is down nearly 25% in 2022, and while the TSX finished the quarter down to a lesser degree, it has still posted a -15% return year to date. The same concerns that have permeated the markets all year continue to weigh on sentiment. While certain supply chain issues are being resolved, labour shortages, the rising cost of living and falling real estate prices are having an impact on investors’ confidence with some opting to invest in longer-term GICs without considering the impact a high rate of inflation can have on these types of investments.

The reverberations of the Russia-Ukraine conflict and sanctions are being felt across Europe with winter fast approaching. The gas leaks at both of the Nord Stream pipelines in southern Sweden and Denmark following the controversy of the repaired turbines being returned to Russia by Canada has European businesses and households on high alert as to the impact this will have on their heating bills. Adding to global economic tensions, the decision and subsequent face of the new UK government to cut taxes on the wealthy just when the Bank of England was about to start taking money out of the system through quantitative tightening sent mixed signals to the market and created a tremendous amount of volatility in the UK bond market putting the UK’s pension system at risk.

As many of our readers know, Manulife Private Wealth engages with Manulife’s Multi Assets Solutions Team (MAST) to update the research and data that go into formulating Manulife Private Wealth’s asset mixes, taking into consideration 5 year, forward looking risk, and return estimates. Manulife Private Wealth’s Investment Committee then approves the updated asset mix shift recommended by MAST if the Committee believes the changes will help our clients reach their performance goals, while at the same time pulling back on the overall risk profile.

When looking at tactical allocation changes, here are some considerations that are made:

The cornerstone of portfolio construction process is the expected return forecasts that we build for your asset classes. We take a 5-year time horizon, which is appropriate for a strategic timeframe and is better aligned with your time horizon. We also selected 5 years because our research indicates that 5 years is the shortest time frame in which we can expect to see “mean reversion” in valuations. Cheap markets tend to go back to more average valuations in 5 years, with 2008 being the best example of that phenomena.  Similarly, expensive markets will tend to return to average over that same period.

In equities, we break down returns into 4 components:

  • Price appreciation, which is highly aligned with nominal GDP growth, which is announced GDP plus inflation
  • Dividend yields, which are for the most part observable and steady
  • Currency impacts because we Canadian investors must translate foreign gains back to our home currency
  • Finally, the valuation component which adds to returns if the starting valuation is cheap and detracts from returns if valuations are expensive

In fixed income, the largest determinant of future returns is the initial level of interest rates.

Apart from nuances that occur in fixed income asset classes that bear a bit more credit exposure, “What you see is largely what you get.”

The most notable change in the investment landscape has been the outsized increase in interest rates.

This development has had a double-edged sword. Firstly, for 2022, the lack of initial yield made fixed income securities vulnerable from a return perspective to any move up in rates. The large move has meant that fixed income securities have not provided the ballast to the portfolios that they have historically, and they have generated significant negative returns. The good news is the reset in rates mean that future returns may be higher, anywhere from 2% to 3.5% higher annually.

In essence, the challenges we have faced in 2022 produce a more constructive outlook which may reward investors who continue to focus on longer term investment objectives.

Learn how Manulife Investment Management’s asset allocation portfolios can provide clients solutions through a disciplined approach to investing and the comfort of knowing professionals are actively managing risk. Connect with us today.

A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other preexisting political, social, and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.

This material was prepared solely for educational and informational purposes and does not constitute a recommendation, professional advice, an offer, solicitation, or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security. Nothing in this material constitutes investment, legal, accounting, or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you.

Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments.

Past performance does not guarantee future results, and you should not rely on it as the basis for making an investment decision.

Diversification does not guarantee a profit or protect against loss in any market.

Neither Manulife Private Wealth nor any other companies in the Manulife Financial Corporation (MFC) group are acting as an advisor or fiduciary to or for any recipient of this report unless otherwise agreed in writing. Neither Manulife Private Wealth or its affiliates, nor any of their directors, officers, or employees, shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here. Manulife Private Wealth does not provide legal or tax advice, and you are encouraged to consult your own lawyer, accountant, or other advisors before making any financial decision. Prospective investors should take appropriate professional advice before making any investment decisions.

The opinions expressed are those of the author(s) and are subject to change without notice. These opinions may not necessarily reflect the views of Manulife Investment Management or its affiliates.  The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only as current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Private Wealth disclaims any responsibility to update such information. Should you have any questions, please contact or ask to speak to a member of Manulife Private Wealth.

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Glen Brown

Glen Brown, 

Former VP, Managing Director, Head of Manulife Private Wealth

Manulife Private Wealth

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