Quarterly review, Q1 2022: disruption – yes; derailment – no

Global upheaval as a new normal?

Our final quarterly review of 2021 argued that we live in an age of uncertainty and that the most effective investment strategies are therefore likely to combine long-term thinking and short-term agility. Events since then have underscored the value of this approach.

Russia’s invasion of Ukraine has understandably left many investors concerned. It has extended a sense of global upheaval that began with the advent of COVID-19 and which has now prevailed for more than two years.

Yet it does not inevitably follow that we should be overcome with worry about our investments. Such an assertion might sound dispassionate, but the harsh fact is that investing and emotion are seldom comfortable bedfellows.

As human beings, we have every right to feel dismayed by the conflict – just as we had every right to feel dismayed by an unprecedented worldwide health emergency. As investors, however, we have to remain cognizant of the bigger picture.

The reality is that few things can comprehensively derail an investment strategy whose time horizon is measured in years or even decades. We saw this with the pandemic, and we are likely to see it again with the still-unfolding tragedy in Ukraine.

Ultimately, although it may require portfolio adjustments, large-scale disruption very rarely necessitates the wholesale abandonment of a prudent investment outlook. In this quarterly review, drawing on an array of Invesco’s Q1 2022 thought-leadership outputs, we illustrate this truth.

Balance and acclimatization

As Paul Jackson and András Vig note in?Sectors in Fed Cycles, the principal source of disquiet for many investors prior to Russia’s “special military operation” was the prospect of monetary tightening. In light of persistent inflation, expectations around the pace and magnitude of interest rate rises have shifted since last year.

Naturally, this issue has been overshadowed of late – but this does not mean that it has gone away. Jackson and Vig, of our Global Market Strategy (GMS) Office, explain why periods of US Federal Reserve rate hikes tend to coincide with outperformance by cyclical assets and why they still see attractions in late-cyclical and technology stocks.

Jackson and Vig extend their analysis in?The Big Picture: Global Asset Allocation 2022, Q2, which explores how the conflict might affect various aspects of the world economy. They conclude that war demands “balance” – which is to say that portfolios should continue to be carefully diversified across asset classes and regions.

Assessing the US’s reaction to the crisis, Chief Global Market Strategist Kristina Hooper also stresses the wisdom of holding firm. She remarks in?The Yield Curve, Inflation, Stock Volatility and More?that stocks are “becoming acclimatized to geopolitical conflict”, that volatility has fallen and that economic conditions – in spite of poor consumer sentiment – are still generally favorable.

Looking further ahead, multi-asset specialists Clive Emery and Benjamin Jones touch on the importance of investment themes. Their article,?The Focus of the Next Decade Will Be Security, Not Just Defence, warns that governments and businesses will increasingly have to strengthen security around the likes of energy, supply chains and food as a result of both the Ukraine situation and COVID-19.

The biggest crisis of all

Perhaps the most significant investment theme of all is climate change. Despite everything that has happened during the past two years, environmental collapse is still broadly acknowledged as the gravest threat to our planet and its inhabitants.

As I observe in?ESG Is Far From Perfect – But..., an article published on the?GreenBiz?website, this is why climate-related investing could constitute an unparalleled growth opportunity. A key problem at present, though, is that investment levels are conspicuously short of what is needed to achieve internationally agreed targets on reducing emissions by 2030.

A second problem is that it is proving difficult to measure and demonstrate the impact of such investments. Moreover, the same can be said of almost all investments shaped by environmental, social and governance considerations.

In?ESG and the Impact Learning Curve, also published by?GreenBiz, I suggest that overcoming this difficulty is among the most pressing challenges in the sphere of responsible investing. I propose three prerequisites for evidencing the investment community’s ability to help bring about positive, lasting change.

The first is to establish what we really mean by “impact”. The second is to prevent the term from being abused. And the third is to accept that some ESG-aware investments are inherently more impactful than others.

The point is that ESG investors want to contribute to a collective effort to “do the right thing”. It is conceivable that their determination to do so could diminish – and might even be exhausted – if it is not possible to verify that this imperative is being met.

The staying power of excellent ideas

Encouragingly, attempts to quantify ESG impact are accelerating. One school of thought holds that a dedicated group of third-party auditors will emerge to apply agreed standards, while another posits that enhanced disclosure will engender greater commonality.

Long-term thinking might be seen as essential here, too, because the fact that we lack universally accepted metrics today does not mean that we will still lack them 10 or even five years from now. Again, there is a huge difference between an investment strategy that needs to be tweaked and one that needs to be completely abandoned.

In the sphere of investment, as in any field, the best ideas tend to last. They will likely evolve over time, yet they will stay fundamentally recognizable. They will be joined by other excellent ideas, yet they will endure.

Modern Portfolio Theory is a classic example. Pioneered by Harry Markowitz in 1952, it still underpins our understanding of asset allocation and portfolio construction 70 years after its introduction.

Markowitz features in?Multi-Period Portfolio Selection: A Practical Simulation-Based Framework, an article in the latest edition of our?Risk & Reward?magazine. He joins experts from Invesco to discuss developments at the cutting edge of portfolio selection and optimization and to reflect on the endless quest to devise superior investment solutions.

We are extremely proud to have one of the most celebrated figures in the history of finance as a research partner. It is reassuring – not to mention humbling – to know that he shares our faith in an informed, flexible, long-term investment philosophy that is capable of rising above the noise in both good times and bad.

Disclaimer: The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in an investment-making decision. As with all investments, there are associated inherent risks.

Selected thought-leadership outputs for Q1 2022

Sectors in Fed Cycles

Paul Jackson, Global Head of Asset Allocation Research

András Vig, Multi-Asset Strategist

Published March 2022

The Big Picture: Global Asset Allocation 2022, Q2

Paul Jackson, Global Head of Asset Allocation Research

András Vig, Multi-Asset Strategist

Published March 2022

The Yield Curve, Inflation, Stock Volatility and More

Kristina Hooper, Chief Global Market Strategist

Published March 2022

The Focus of the Next Decade Will Be Security, Not Just Defence

Clive Emery, Fund Manager

Benjamin Jones, Director of Macro Research, Multi-Asset

ESG Is Far From Perfect – But...

Henning Stein, Global Head of Thought Leadership and Market Strategy

Published February 2022

ESG and the Impact Learning Curve

Henning Stein, Global Head of Thought Leadership and Market Strategy

Published March 2022

Multi-Period Portfolio Selection: A Practical Simulation-Based Framework

Kenneth Blay, Global Head of Thought Leadership Research

Anish Ghosh, Senior Analyst, Research and Analytics, Invesco Quantitative Strategies

Harry Markowitz, Invesco Investment Solutions Research Partner

Nick Savoulides, Head of Research and Portfolio Analytics, Invesco Investment Solutions

Published March 2022