It’s a big year for big moves.

You’re not imagining things if you think equity markets have felt more volatile than usual in the year to date. Expensive growth-oriented US shares are already well into a bear market, after all, along with emerging-market equities. Bonds prices have also been tumbling this year.

There’s been a wide distinction between the volatility in US equities and that of domestic shares so far this year. Exhibit 1 plots the daily percent change in each market for the year to date.

The blue-shaded areas for US equities generally have a much wider range than the orange-shaded areas for domestic shares. Conditions have been tamer at home than abroad aside from the earliest days of Russia’s invasion of Ukraine.

Tamer tape = tinier tumble.

All the cheer in the world won’t distract from the fact that UK shares are, in fact, down for 2022. But they’ve fallen by considerably less than the lion’s share of other markets. Exhibit 2 on the next page highlights equity performance in the year to date across developed markets.

UK shares are thankfully the third best performer in 2022 (after Norway and Australia). Domestic equities are down by roughly a third of the loss in US shares. Sometimes exposure to the US and emerging markets can drive outsized gains versus the UK, and sometimes it can introduce more volatility and deeper losses.

Investor hands are not tied, but they should sit on them.

The unpredictable nature of performance across different markets is what makes diversification such a powerful tool. Over the long term, a globally diversified investment portfolio can harness the risk reduction and return enhancement potential that owning a wide variety of assets with varying correlations can provide.

No one can credibly answer when or where this selloff will conclude, but investors should take a great deal of encouragement from the simple fact that recoveries have been much more potent than downturns through history.

While you have no control over the depth of the decline, you do have the last word on how much of a downturn you’re willing to tolerate. We recognize that the market environment has been inhospitable in 2022. The simultaneous selloff in bonds has added an uncommon challenge into the mix.

As losses grow, it can be tempting to consider a temporary exit in favour of cash. But when would be the right time to re-invest? And while cash is always susceptible to inflationary erosion, price increases are currently running at multi-decade highs.1

We urge investors to consider the wisdom of shouldering a significant downturn and then exiting. Bearing the pain of the decline is an investment in the eventual recovery, which history suggests will eclipse the selloff. Exiting for cash is akin to relinquishing this investment.

Our view.

There’s no denying that headwinds persist on the path to recovery. Inflation is raging—and central banks may be underestimating what it will take to bring it back to earth. The war in Ukraine is exacerbating the commodity shortage—most notably in fuel and food inputs. COVID-19 continues to snarl global supply chains.

As active investment managers and asset allocators we view these types of environments in terms of the opportunities they offer. A globally diversified investment portfolio will not have endured the full brunt of the selloff in US or emerging-market stocks.

Opportunities are beginning to abound. High-priced US shares started selling off earlier than the broad market and have fallen by much more. This means they’re moving back toward valuation levels that are more in line with the rest of the market. Value-oriented equities still look attractive, and we expect to see bargains in equities if the market falls a bit further.

We remain nimble in fixed income, as always, adding credit or duration exposure as spreads widen and removing risk once spreads tighten. Higher volatility creates more opportunities to manage these exposures.

We remain nimble in fixed income, as always, adding credit or duration exposure as spreads widen and removing risk once spreads tighten. Higher volatility creates more opportunities to manage these exposures.

Less-efficient areas like emerging markets offer significant opportunities for active managers. Emerging-market equities have been in a bear market for several months, while emerging-market debt yields have been driving higher. The diverse opportunity set in emerging markets tends to reveal itself during downturns, providing the opportunity to identify attractive risk-and-return trade-offs.

Glossary of financial terms

Active investment management: Active investment managers work to construct and manage investment portfolios. Active managers can use investment analysis, market research, forecasts and judgments to make buy and sell decisions about portfolio assets.

Bear market: A bear market refers to a market environment in which prices are generally falling (or are expected to fall) and investor confidence is low.

Downturn: A downturn is a period during which prices fall across one or more asset classes.

Selloff: A selloff is a period during which prices fall across one or more asset classes.

Tape: Tape refers to the ticker tape used to deliver and report stock prices as the distribution of stock tickers in the 19th and 20th centuries expanded the availability of information about stock markets.

Yield: Yield is a general term for the expected return, in percentage or basis points (one basis point is 0.01%), of a fixed-income investment.

Index definitions

The FTSE All-Share Index represents 98% to 99% of UK equity market capitalization. The Index aggregates the FTSE 100, FTSE 250 and FTSE Small Cap Indexes.

The MSCI World Index is a free float-adjusted market-capitalisation-weighted index that is designed to measure the equity market performance of developed markets.

The S&P 500 Index is a market-capitalization-weighted index that consists of 500 publicly-traded large US companies that are considered representative of the broad US stock market.

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