What’s happening in the markets and to your pensions and investments?

We asked Adrian Gaspar, Investment Director for the M&G Treasury and Investment Office, for an update following the Autumn budget. In particular, what they’re doing to monitor your investments, including PruFund and Risk Managed ranges, through the recent market turmoil and beyond.

This is Adrian’s opinion, for your information only, and isn’t meant to be taken as financial advice or a personal recommendation for any particular course of action. And remember, the value of your investment can go down as well as up so you may get back less than you put in.

This has been a very tough year for most investment markets, and one word has dominated, inflation.

If we cast our minds back to January, you may remember that most Central Banks had either started raising interest rates or were about to, as inflation has been high since the pandemic. This was in part because of China’s zero Covid-19 policy and meant that 2022 was always going to be a challenging year for government bonds, as they’re particularly sensitive to interest rate changes.

Things then took a rapid turn for the worse towards the end of February, with Russia’s invasion of Ukraine. This had a huge impact  on the supplies of several important goods like grain, for example. It also became clear that gas supplies to Europe were going to reduce significantly, in turn driving up the price of a vital source of energy for most of Europe.

So in effect, a major inflationary shock was added to an environment already suffering from high inflation. This was terrible news for government bond markets, that are usually seen as ‘safe haven’ assets in times of market stress. At the same time, doubts around continuing economic growth led to a wide-spread sell off in equity markets (shares).

All in all, a very unpleasant cocktail.

We then saw the pound take a dramatic fall in September after the government’s unfunded tax-cutting plans. The financial markets became nervous and the Bank of England stepped in to help calm the situation by buying back government bonds. The subsequent tax cut reversal and new Chancellor Jeremy Hunt’s budget changes were aimed at reassuring the market. The Autumn Statement continues to focus on stability and there was very little reaction from the markets, which suggests that there were no major surprises.

What I would say to PruFund clients is that we understand that it is very uncomfortable to lose money in the short term, particularly in lower risk funds, but the overall returns across the range are strong compared to many other multi asset fund ranges. And we can also include PruFund Planet in this – smoothing has definitely helped.

It has been a tougher year for the LF Prudential Risk Managed Active and Risk Managed Passive ranges* but we continue to believe these funds offer the potential for good returns in the future. This is a longer-term investment.

Finally, the M&G Sustainable Multi Asset funds have also had a challenging 2022 but the team believe the current valuations of many asset classes are more attractive than they were at the beginning of the year, which hopefully is positive for longer-term returns in the future. 

We’re fundamentally long-term investors, trying to build portfolios that we believe will produce consistent returns over the next few years.

We’re always aware of current markets and when there’s a lot of uncertainty our priority is to be vigilant because we’re responsible for many tens of billions of pounds of policyholder money. Our most important day to day role is to ensure that money remains allocated effectively and efficiently. And at times, for example earlier this year, we held daily meetings with the entire management team to discuss markets and understand if they were functioning correctly.

We’re investors, so while markets have been volatile and uncertain, we need to be pro-actively looking for new investment opportunities or indeed, be prepared to adjust portfolios. So for example, at the beginning of the conflict in Ukraine we reduced equity exposure (shares) and increased cash. Holding extra cash can be very helpful particularly if market activity starts to dry up, as this can cause difficulties.

We have also reviewed the long-term positioning of all multi asset funds and generally reduced risk a little bit, whilst also adding to areas like Indian equities and Emerging Market Bonds that we feel offer different potential sources of return.

It’s unfortunately still uncertain for the next few months and it really comes back to that one word, inflation. And we can also throw Brexit, China and Covid-19 into the mix.

If Central Banks see evidence of inflation falling with economic growth slowing and, I hate to say it, unemployment rising, that should see them easing interest rate increases, or even better stopping them.

It’s difficult to confidently forecast when this is likely, but most people believe we may see these scenarios in the second half of 2023. Sadly, this will likely mean recessions, and the Bank of England and OBR (Office for Budget Responsibility) have already suggested this is happening in the UK – the OBR predicts the economy could emerge from recession after Q4 2023.

We should remember that the difficult markets of 2022 have been painful, but it also means that many types of assets are now looking very attractive on a forward-looking basis. We believe there will continue to be opportunities for long-term investors like the Treasury & Investment Office, if we accept there may be still more volatility to come.

Our customers can be assured that we’ll continue to monitor markets to ensure their investments are positioned to grow over the longer term.

*The M&G Treasury and Investment Office (T&IO) set the asset allocation for each portfolio. M&G Investment Management Ltd are the investment managers for the LF Prudential Risk Managed Active and Passive funds. They make the relevant adjustments to the portfolios based on T&IO recommendations.