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In previous updates I have tried to tell some of the story of 2022, which based on the year thus far could best be described using a quote from Her Majesty the Queen’s speech from 24 November 1992 as her ‘Annus Horribilis’.(2) Whilst we are only half through 2022, it is fair to say that for almost all investors, so far it has been a bumpy ride. The most commonly asked question I get at the moment is whether it is going to get worse before it gets better and if so, when. So, I want to explore some of the driving factors that could influence markets to either become more pessimistic or investors to start believing that we are either at, or near the bottom, and seeing the turmoil as an investment opportunity. To do this, let’s start by reflecting on how different investments have performed over the last six months and why.

In my update on 26 May I explained the story behind why bonds have performed so well for so long. Over more than 40 years, yields fell to almost zero thus helping investors to benefit from the rise in value of their fixed income investments.(1) Over the last 18 months yields have begun to rise in response to a change in expectations for future interest rates.(1) This has led to yields on all types of bonds, but especially government bonds to rise sharply.(1) When investors try to ‘price-in’ higher interest rates, in simple terms, they are trying to predict how high rates will go and importantly, how quickly. Often, 10 year government bonds provide a ‘proxy’ for what interest rates might be in 12 or 18 months’ time.

This sharp rise in yields and respective fall in the value of bonds has coincided at the same time as the sell-off in shares as bonds have been unable to provide the diversification benefits normally expected in a portfolio over the longer-term. In terms of performance the UK bond market has been hit the hardest. From July 2020, when 10-year UK Government bond yields hit a record low of 0.1%, they have risen to 2.5% as at the time of writing.(1) The consequence is the value of the Bank of America (BofA ICE) UK All Gilt Index has fallen just shy of 16% year-to-date with the UK (BofA ICE) All Corporate Bond Index down just over 15% in value.(1) US high yield and US corporate bonds have fared better with falls of just under 5% and 7% respectively.(1)