Our 2023 annual outlook summarises our views and insights on the key questions impacting our portfolios today.
By now most of those reading this letter will know that 2022 was the worst year for most asset classes since 2008 so we will not cover it in too much detail. It was, remarkably, only the seventh year since 1871 that both stocks and (the usual safe haven of) government bonds were down in unison.
Looking across asset class returns shows there was limited opportunity for investors to generate positive returns outside of energy related investments. Most stock and bond markets were negative, but some alternative investment strategies held up better such as macro hedge funds, highlighting that in practice it was very difficult to achieve diversification for most global investors. Why was this the case? The last 10-year period of very low rates had in our view two key impacts:
- It drove all asset prices to rise together, as the discount rate fell – resulting in higher
asset class correlations - It caused investors to “chase” returns, by allocating more to speculative assets or illiquid
assets in an attempt to secure higher returns
