As the market entered 2022, the narrative and debate on US Federal Reserve’s interest rate hike intensified. Consequently, long-duration stocks and bonds alike bore the brunt of the market selling as investors weigh the consequences of an impending rate hike(s) as soon as March. As an active real money manager, we are humbled by the varying market scenarios confronting investment portfolios.

2022 is different from 2020. Then, the world was impacted by COVID shock and countries required urgent actions from their governments to shore up their economies. In 2022, things are starkly different. While the developed nations are well on the path to re-opening the industries impacted by the pandemic, many poor and emerging countries are struggling to get up on their feet. Meanwhile, the US Fed Reserve has the unenviable, herculean task to balance the risk of derailing the global economic recovery process, while ensuring inflation threats do not spin out of control. It is becoming obvious that the Fed is now caught late behind the curve to fight and contain inflation, and must strike fast to regain her credibility.

The tussle between market forces, many a time in opposing directions, took a toll on the fund. Investors were hard challenged on the prospects of ongoing recovery from the pandemic versus unwelcomed, unexpected stagflation in the event of runaway inflation in the US and elsewhere. And just when we thought the swings and volatilities in capital markets were about priced in, Russia invaded Ukraine! All hell broke loose. The fund took a sharp beating given the worsening prospects of price pressures, simply because Ukraine/ Russia together accounted for a sizeable percentage of the supply of basic food (wheat, for instance) and commodities to the world. That also resulted in a hawkish about-turn of the Fed’s narrative and added to investors’ concerns about inflation if the conflict in Ukraine did not end swiftly.

The global business and economic backdrop in 2Q 2022 are expected to remain fragile. Alongside, the international credit story will be uneven across geographic regions, businesses, and industry sectors. That post inherent risks for the fund, and we see an immediate need to protect investors’ assets in case markets undershoot to the downside. Ironically, among the safest havens to take shelter from the impending US rate hikes is the Chinese high yield property bonds. Our strategy, for now, will be to protect the fund against asset loss and raise our holding of cash reserves. At the same time, where possible, we will switch out of long (call) bonds to short-dated ones, or even more. Cash holdings of the fund is highest among global peer funds at 14% currently. We will stay nimble, taking opportunities offered by the quality short duration bonds, and earn stable income as they pay off in 2022/23.

Despite the choppy sea and windstorms out there, we remain confident to deliver returns and preserve the capital for investors over the long haul. We continue to see a distinct investment advantage to safety and security in quality global financial and corporate credits. This is truer now than before, given that credit spreads have widened out and repriced under a much tighter market condition. We are therefore able to deploy cash reserves and switch and rebalance the portfolio by moving into higher quality credits for similar returns expected for the fund. Importantly, it is noteworthy that this time, the balance sheets of major global banks are strong and healthy, thankfully.

To this end, we wish for a swift, peaceful resolution to Russia / Ukraine conflict and safe investment for everyone in 2022!

Mar 2022