With central banks clearly in play, financial markets are likely to see higher volatility in the year ahead. This should create some great opportunities for patient investors. Schroder have increased cash levels and reduced riskier credit exposure over the most recent quarter in anticipation.
Looking forward into 2022 we are once again in a period where markets are uncertain given the Omicron variant overlayed with the risk around inflation and the growth outlook. The risk of rising inflation appears to be fading into 2022 but central banks will still need to wind back liquidity support and lift official interest rates. This transition will be a delicate balance between adjusting policy settings and the economic uncertainty that will likely feed into market volatility. This policy adjustment is against a moderating growth profile. Whilst we do not foresee a recession, a slowdown is underway which the risk of the Fed entering into tightening cycle as growth is rolling over which can exacerbate the downside risk in markets.
Against this backdrop the Schroder Multi-Asset fund remains defensive and liquid. The repositioning of the portfolio has been to focus on capital preservation at this stage of the cycle. With credit spreads fully valued, capital growth is less likely and we find ourselves in a carry phase. The uncertainly around the profile of normalisation of interest rates also means we do not favour adding duration risk. The adjustment process can hit capital values as we have seen in the past and hence we hold little exposure. Cash holdings are elevated and ready to deploy as market re-pricing provides better opportunities.
(Schroder article, Mihkel Kase, Fund Manager – Fixed Income and Multi-Asset, 12/01/2022)