Entering the New Year with Renewed Optimism
Financial markets endured another turbulent year throughout 2021, albeit the resilience of investor sentiment helped risk assets push past numerous selloffs throughout the year. After a cautious yet active fourth quarter for the OBI portfolios, the reinvestment of our elevated cash levels throughout December provided a welcome boost to 2021 performance, as financial markets benefitted from a ‘Santa Rally’ in the lead up to the end of the year. It is no secret that 2021 had been a challenging year owing to the continued disruption caused by the pandemic, however, we have finished the year on strong footing once again, with the OBI portfolios well-positioned to begin the next chapter.
Our higher risk portfolios that contain higher levels of equity experienced the highest gains, achieving returns of up to 11.13% as earnings improved, vaccination rates rose, and risk sentiment strengthened as regions exited pandemic restrictions. The lower risk portfolios also exceeded their annualised rate of return targets, with a much higher allocation to non-equity sectors that are typically less risky within financial markets.
The higher risk portfolios have provided double-digit performance growth for the second year in the row, with half of the OBI portfolios beating their benchmarks again despite their frequently lower equity allocations. We were mindful of achieving portfolio growth for a comfortable volatility profile throughout the year, and we will continue to look to remove excess volatility from the investment journey as we embark on a new challenge throughout 2022.
Having mitigated volatility towards the end of 2021, we redeployed the elevated cash levels throughout December to reflect our renewed optimism. With the cash levels between 2% to 4% across the OBI portfolios, we remain optimistic on return potential in 2022 and we are well-positioned to benefit from an acceleration in key trends and rotations observed over 2021. Across the portfolios, we have aimed for balanced exposure between value and growth-oriented risk assets given the potentially uncertain macroeconomic backdrop in 2022. We are tilted towards UK equities, while the rest of our equity allocation is diversified across the globe, with a notable preference for exposure that leans towards sustainability. In our non-equity allocation, the portfolios have diversified exposure through property, infrastructure, credit, inflation-protected bonds, and corporate debt across the risk spectrum.
A Volatile Start to 2022
Financial markets have begun 2022 with a rotation from growth to value, as investors refocus on 2022’s expectations for interest rate rises over the next twelve months. Technology-heavy stocks suffered heavily in the first few trading sessions of the year, with interest rate expectations, Jerome Powell comments, and surging government bond yields reducing the appeal of their long-term earnings potential. While interest rates are forecasted to rise to 90 basis points and 60 basis points in the US and UK respectively, Jerome Powell’s hawkish signal that the Fed may have to hike rates sooner than anticipated spooked technology-focused investors. The hawkish shift has occurred as concerns about Omicron wane, as data shows the more contagious variant has resulted in fewer fatalities across the globe.
These factors have subsequently helped to contribute to the jump up in government bond yields, with the US 10-year rising to the highest point since pre-pandemic levels, just above the peak of 2021’s 10-year yield.
Given the influence of Federal Reserve interest rates and US government bond yields across the globe, asset allocation decisions within the US, Europe, and Asia have all been impacted. While US equities, which are dominated by large-cap technology firms, have suffered, cyclical markets like the UK and Europe have benefitted as financials and energy share prices rose. In Asia, equity markets have been mixed throughout the first week of the year, with equities typically continuing the trend that was in place towards the end of December.
Within non-equity sectors, the only positive performing region has been Index-linked Gilts, which have benefitted from rising expectations for inflationary pressures as Omicron concerns wane. The other non-equity sectors have fallen as risk sentiment returns to financial markets, albeit targeted towards value-oriented exposure.
For a performance review and outlook for regions across the globe, please refer to this week’s market update.
Having achieved another year of portfolio outperformance, we remain optimistic that major macroeconomic themes and selective regional exposure will help the OBI portfolios perform strongly over the next twelve months. While an array of risks remain, provided the world avoids a new wave of vaccine-resistant Covid-19 infections, we expect the majority of investors to continue to look past short-term uncertainty as the global economy adjusts to the ‘new normal’.
*Please note the table below shows the performance from the last market commentary to the end of the year, however the Year-to-date (YTD) change column remains blank due to this being the first market commentary of the year.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment. OCM Wealth Management Limited is authorised and regulated by the Financial Conduct Authority (FCA Registration No: 418826) OCM Asset Management is a trading name of OCM Wealth Management Limited
Key Events We Are Watching Over the Coming Weeks:
- Friday 7th: European Inflation Rate, December.
- Friday 7th: US Non-Farm Payrolls, December.
This Day in History
On this day in 2021, supporters of President Donald Trump stormed the U.S. Capitol, where Congress was meeting to certify Joe Biden’s win in the 2020 election.
Thank you for reading, have a great week!
Jason, Gina & Ben