Our multi-asset investment views - November 2022

The RRF posted strong returns in November (+2.9% pre fees). While returns for the year are still negative (reflecting the breadth of market weakness in 2022), November highlights both how quickly markets can turn but also recognises that better value that has already started to appear in many asset classes. In late September we added risk back into the portfolio from cash and this has been positive for returns. As our Key Views (below) suggest, we are starting to fade the rally in equities, both through starting to trim our equity exposure, but also through the outright purchase of downside put option protection.

Schroder Real Return Fund performance comparison

*These figures are for illustrative purposes only and are not to be taken as a recommendation to buy, sell, or hold. Past performance is not a reliable indicator of future performance and may not repeat.
*Please note any past performance mentioned is not a reliable indicator of future performance and may not be repeated.

Recent downturn

Equities | CAUTIOUSLY CONSTRUCTIVE | no change

While inflation remains uncomfortably high in key economies, evidence is accumulating that it has peaked in the US and begun to moderate. This reflects signs that rising rates are slowing demand (for example rents in the US which comprise around 1/3 of the US CPI are moderating as housing demand slows) at the same time, the oil price has moderated back to around USD 80 / barrel (from a peak of USD 108).

Having repriced materially on the back of high and rising interest rates and moderating profits, equities have rallied reflecting both an oversold market and confidence that the Fed (and other central banks) can now start to moderate the size and pace of rate hikes. More fundamentally, valuations had improved as the clearly overvalued segments of the market sold off. We had anticipated this with the upgrade to our equity view over the last 2 months and reflected it in a reweighting to equities across our multi-asset portfolios.

There are still significant headwinds for economies and equity markets. Firstly, inflation remains uncomfortably high, and where it settles over the medium term remains unclear. Against this uncertainty, central banks, and in particular the US Federal Reserve, will continue to raise rates and withdraw liquidity (even if at a more moderate pace). Secondly, while economic growth is slowing, we are yet to see any material economic pain in key economies like the US and Australia. While sectors like US tech are shedding labour, overall unemployment rates remain very low, and consumers appear to be drawing down savings to support consumption. Our indicators however still suggest recession as a base case in 2023 and which will mean further weakness in earnings to come. Finally, while valuations have improved (materially in the case of some markets like Europe), they are yet to price recession. All this suggests that the rally in equities since end September is built on fragile footings and we are sceptical about its ability to endure much into next year.

We think the key risk to this view is that the downturn is shallow, but extended, implying weak earnings for an extended period but not a collapse and that this will likely keep rates elevated for an extended period. This would likely moderate any major drawdown from here in equities (given this scenario is probably not inconsistent with what’s priced) but also potentially limit the extent of the recovery. In other words, an extended grind for risk assets, compared to a sharp collapse and recovery.


The rise in sovereign yields and the widening in credit spreads had significantly improved the attractiveness of credit across the curve. At a headline level, yields of close to 10% in Global High Yield Debt and 5-6% in Investment Grade in late September represented attractive medium-term opportunities. Investors also recognised this with credit rallying over the last 2 months, benefitting from both a rally in sovereign yields and a compression in credit spreads. While the attractiveness of credit has abated at the margin as a result, we still see it as offering reasonable value and importantly good carry in our portfolios given the overall higher level of yields.

As the focus shifts from inflation and rising rates to the impact of this on economic outcomes (i.e. recession risk) in 2023 we would expect to continued volatility in credit. However the attractiveness of credit in this environment is helped by the fact that if recession risk accelerates then sovereign yields will rally (offset of course by wider spreads), and if recession risk abates, spreads will narrow against a backdrop of upward pressure on sovereign yields. In other words, the risks to credit in 2023 are likely much more muted than they were heading into 2022 when the risks were clearly skewed to the downside.

At current yield and spread levels, we continue to see Investment Grade credit being preferred from a risk adjusted basis.

Duration | Neutral | Previously NEUTRAL

With accumulating evidence of inflation (globally) having peaked, the pace of monetary tightening will start to moderate. That said, there is clearly more work to be done. Central Banks acknowledge this, but with many adopting relatively hawkish approaches, we are starting to see official rates (and market pricing of official rates) enter restrictive territory. Against this backdrop, we think it’s likely that sovereign yields have peaked, particularly at the longer end of yield curves. However, with bond yields in key markets like Australia and the US having fallen off their highs (in the order of 75 bps) we do not expect much more of a rally from here near term. Inflation peaking is one thing, how far it moderates, and where it settles from here remains far from certain.

Central banks may well be entering a more watchful period as they assess through the data the impact of prior rate moves on output and inflation. Policy errors can go both ways with the risk of “too much” or “not enough” are both possible scenarios in the current environment. We think though that for the US Fed at least, the risk of not doing enough to slow demand is less likely than doing too much. Jay Powell does not want to be the Fed chair that lets inflation out of the bag and didn’t act aggressively enough to reign it in. The lessons of the 1970’s support this.

From a market perspective, the front end of the US bond curve, due to its higher rates and flat curve signals that term premia remains low, and that moving longer out curves is still not rewarded today.


While the USD is expensive on most valuation metrics, its being supported tactically by both the hawkish Fed and broader global uncertainty. While we do think longer term it will weaken, it remains an effective risk-off hedge and this mitigates any negative USD view based on valuations. We remain positive on the JPY given its cheapness, and the fact that it is typically a good risk-off hedge.

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