Investment

Chart of the Summer – When the FED tightens, there is (almost) no place to hide

by Angel Sanz

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:

  1. 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.
  2. 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.
  3. 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:

  1. 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.
  2. 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.
  3. 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%.
  4. 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.
  5. 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%.
  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.

 

 

 

 

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer.  Additional information is available on request.

© NS Partners Group

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Antonio Mira
CHIEF FINANCIAL OFFICER, MEMBER OF THE EXECUTIVE COMMITTEE

Antonio Mira joined NS Partners in 2006 as Group Chief Financial Officer. He heads the corporate functions and is involved in coordinating and implementing the decisions of the Executive Committee.
An experienced bank auditor, Antonio started his career in 1995 with Arthur Andersen, where he worked for some 7 years before joining Ernst & Young in 2002 as a Senior Manager.
Antonio is a Swiss chartered accountant and a Business graduate of Lausanne University (HEC).

Sébastien Poiret
DEPUTY HEAD OF WEALTH MANAGEMENT

Sébastien Poiret joined NS Partners in 2008 and manages funds of hedge funds and private client mandates. He also oversees the development of the Group’s offices in Mauritius.

Prior to joining NS Partners, he served as a Trader, Head of Manager research and Portfolio Manager in the USA and Switzerland for a single hedge fund (1998-2004) and for Optimal (2004-2008), Grupo Santander’s fund-of-hedge funds operations.

Sébastien holds a Bachelor’s degree in Corporate Finance from the ESPEME Business School (EDHEC Group) and an MBA in Finance and Economics from the Institute of Business Administration, both in Nice.

Abir Oreibi
BOARD DIRECTOR

Abir Oreibi joined the Board of the NS Partners Group in 2018, where she brings her truly international perspective and rich experience.
Among many other ventures, Abir set up Alibaba.com’s first European office. After living and working in Shanghai, Hong Kong, Bangkok and London, she now lives in Geneva, where she is CEO of Lift Events, an organization that identifies technology trends, their business and social impact through the organization of events and open innovation programs. Issues related to the challenges and opportunities created by new technologies as well as the strategic responses from organizations are at the heart of Lift’s activities.
Abir holds a BA in Political Sciences from the University of Geneva. She is an investor, and member of advisory and innovation boards.

Romain Pidoux, CAIA

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Romain Pidoux joined NS Partners in 2011 and heads the Group’s Risk Management.
He started his financial career in 2005 as Head of Quantitative Analysis for a Swiss Family Office, selecting funds and managing portfolio allocation. In 2008, he switched to the alternative world and joined Peak Partners as hedge funds analyst.
He is a Chartered Alternative Investment Analyst (CAIA) and holds a Master’s degree in international relations from the Graduate Institute of International Studies at Geneva University.

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