Global vision

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  By Guest Blogger Doug Rowat

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2022 had it all.

A war involving a nuclear superpower. 40-year highs for inflation. The start of what ultimately amounted to 11 rate increases from the US Federal Reserve and an incredible 500 basis points added to its benchmark overnight rate. A bear market for equities. The worst bond-market returns in 50 years. And if all of that wasn’t enough, the most surreal of pop-culture moments: an Oscars smack heard round the world.

So, yes, it was a wild year. But from an investment perspective, it was a reminder that to properly control volatility and provide better downside protection, a portfolio should be globally diversified. Both US equities and bonds were a disaster in 2022. Highly unusual, of course, as normally when equities sell off sharply, fixed income hangs in. (To illustrate, in 2008, during the financial crisis, the Bloomberg US Aggregate Bond Index was up more than 5% on a total-return basis versus a 37% total-return decline for the S&P 500.) However, the massive rate increases from the Fed in 2022 took care of that traditional relationship. Normally, asset class diversification provides portfolio defense. Not so in 2022.

However, portfolio diversification still worked in 2022, it just worked in an unusual way. Asset class diversification wasn’t doing much, but geographic diversification was. If there was any doubt that maintaining a global portfolio is important for providing better downside protection, 2022 eliminated those doubts.

Here, for instance, is how many key global equity markets performed versus US bonds and equities in 2022:

Select 2022 benchmark returns (%): 2022 wasn’t easy, but being geographically diversified help

Source: Bloomberg, Turner Investments. Total returns, local currencies

No one would have thought that Canadian equities, for instance, would play far better defense than investment-grade bonds during an ugly US-equity bear market, but such was the case in 2022.

And when building a global portfolio, use ETFs. We’ll be the first to tell you that we couldn’t pick, say, the best Japanese consumer-staples stock to save our lives. But we do have an understanding of what drives the Japanese equity market collectively. I’ve discussed this here before (https://www.greaterfool.ca/2022/12/10/crowd-surfing/). Therefore, a broadly diversified ETF is the best way to express a regional view as it avoids concentration and stock-selection risk.

So, think global. Portfolio defense often comes from unexpected places.

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Finally, another US presidential election year featuring Donald Trump is upon us. The media will, of course, continue to highlight his scandals, threats, divisiveness and characteristically strange behaviour throughout 2024. And many of our clients are, understandably, concerned regarding the impact a chaotic presidential election year might have on their portfolios.

However, remember that a presidential-election year featuring a provocative, unpredictable—and often downright weird—Donald Trump isn’t new. After all, 2016 was the year that he called Mexicans “rapists” and 2020 was the year that he suggested we inject “disinfectants” to treat Covid. But markets took both his 2016 and 2020 presidential campaigns in stride with the S&P 500 advancing 12% and 18%, respectively, on a total-return basis. And, more broadly speaking, election years tend to be positive for the market the vast majority of the time anyways:

The last 2 presidential election campaigns were filled with Trump craziness. But, as they almost always do in election years, US equities took it in stride

Source: Global Finanancial Data Inc

And, as distasteful as it may be for many, Trump may even get re-elected. But don’t necessarily equate a Trump presidency with a market downturn—the S&P 500 advanced more than 14% annually during his last tenure as president.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.

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About the picture: “You asked for pooch pictures, and here’s our Rusty,” writes Harry. “You could not have asked for a more loyal friend. Always protective and never letting us out of his sights. He passed several years ago, but will always be remembered.”