It might be natural for people to panic during market turmoil and worry about the negatives coming your way. But investors need to adopt a long-term mindset, and reacting to the immediacy of macroeconomic news can do more harm than good.

If we go back to the eve of the mini budget, the Bank of England announced a 50 basis point interest rate hike and declared the UK to be in recession. UK bond yields rose and a peak in the US bond market took place on the same day. Despite the outlook, the Bank of England failed to follow the Fed’s path of a 75 basis point rate hike in September. We even saw a member of the monetary policy committee vote for a simple 25 basis point hike. This affected the British pound and there was a continued global run into the US dollar.

On the day of the mini-budget, many new details surprised market participants. Launching a growth agenda with increased government spending in an inflationary environment and the need to raise interest rates amid stagflation was bold, to say the least. Many consider it reckless. But looking at the details, 90% of the expenditure in terms of the volume of money put into the budget had already been announced a few weeks before. This includes the large-scale energy rescue plan.

What has likely exacerbated the sell-off of UK gilts has to do with the pensions market. A number of defined benefit pension funds use liability driven investing (LDI). These schemes contribute to the liability mismatch of the pension fund, using derivatives to better match their assets with long-term liabilities. The collateral provided to the counterparty behind the derivatives will take the form of high quality liquid assets such as government bonds.

Margin calls

Having to respond to margin calls likely added fuel to the fire as bonds sold off and their yields rose further from the previous day. This led the Bank of England to intervene in the gilt market. Clearly, volatility has been extremely high, as evidenced by last week’s daily returns of the UK inflation-linked government bond 2073: -27%, -24%, -20%, followed by 115 %, 16% and 33%. .

Year-to-date to September 30, global bonds are down 20% in US dollar terms, although when hedged to sterling the Bloomberg Global Aggregate Index is down 12, 8% in sterling over this period. UK gilts suffered, falling 25.1%.

The pound also sold strongly amid the fury, but a week later on Friday September 30 it was back to where it was the day before the mini-budget. In the foreign exchange markets, the main element this year is the strength of the dollar against the vast majority of currencies, including the pound.

Investors often look for a hook to frame a big bounce or dip around a particular event; in this case, announcements on mini-budget day. But there was already a lot going on just before that. Some commentators are worried about a possible liquidity event, but in the context of global issues, the UK is not an island. We’ve seen double-digit inflation set in across Europe, energy bills soaring (the UK’s commitment to its people to counter this is the highest of any European country, although that taxpayers will bear most of the cost in the long run), and consumers everywhere are really feeling the pressure.

Additionally, Apple reported weakening demand for its new iPhone, leading to selling pressure on tech stocks; China’s growth is rapidly stagnating; and US stocks hit their lowest level in two years. In fact, in September and year-to-date, the FTSE All Share stock index has fallen less than global equities and has significantly outperformed the Nasdaq.

What do fund managers do?

There may be more pain ahead, with the possibility of another market drop.

Ruffer, whose strategy has a Morningstar Bronze analyst rating and emphasizes capital preservation, has completely battened down the hatches. Team leader Henry Maxey believes there is growing pressure in the markets, linked to a combination of interest rate hikes and central banks now on a path to quantitative tightening, and that we We will see further liquidity crises as financial conditions continue to tighten. As a result, it is “extremely conservative” and the strategy has its lowest equity exposure. He believes cash offers the opportunity to trade distressed assets, but isn’t ready to put the dry powder to work just yet. Beyond capital preservation, the fund managers we’ve spoken with in recent weeks admit that, while things could get worse, they see quite attractive valuations in some of the equity and fixed-income securities. This margin of safety opens up long-term opportunities.

Silver-rated manager Alex Savvides JOHCM UK Dynamic Funds, acknowledges that there is a lot of earnings uncertainty, but points out that he has never seen a single-digit P/E like we have today. He is therefore cautiously bullish on the market and sees UK valuations as cheap on an international basis. The investment process here is based on identifying transforming companies that are not yet fully recognized by the market and seeks to find management teams ready to make changes that will improve capital returns and cash flow. . For now, the team is finding ideas in undervalued growth and restructuring prospects, rather than pure recovery strategies. One contrarian area he has added himself to over the past 12 months is real estate. The impact of the downgrades has been felt, but with Land Securities, for example, Savvides is supported by better capital allocation decisions underway.

On the global equity side, James Thomson, manager of the bronze-listed company Rathbone Global Opportunities Fund, has a growth bias, which has hampered performance so far this year. Amid the worst market sentiment Thomson has seen since 2008, it has used the hindsight to buy what it sees as quality growth companies, while avoiding some of the high-growth darlings of recent years, such as Shopify. , which was sold in the first quarter. It has a defensive portion of the portfolio through companies such as Costco and McDonald’s; this amounts to 20% of the assets. But over five years, he doesn’t expect these types of companies to drive performance. When looking for a more pronounced growth trajectory and with a focus on quality, its recent additions include Equifax, Boston Scientific and Remy Cointreau.

In the multi-asset space, Jacob de Tusch-Lec, Head of Bronze Monthly distribution of Artemis, looks for stocks that can contribute to the fund’s monthly income target. Along with a value trend, this is leading to an underweight to low yield areas like the US and technology, but de Tusch-Lec is currently finding opportunities in areas like Europe and Japan where split yields offer an attractive spread over the local risk-free rate. , in local currency. Meanwhile, his co-managers responsible for the fund’s bond portion, David Ennett and Jack Holmes, see an attractive risk/return offer in the US high yield sector. The team tends to avoid big swings in its stock and bond allocation but, given current yields, is looking at new selective high yield ideas. What the team considers to be world-class companies are now posting returns of 7-8% following the movements seen in rates and spreads since the start of the year.

In fixed income, within the Global Flexible Bond cohort, Silver-rated M&G Global Macro Bond entered the period of market turmoil with low exposure to UK assets. Manager Jim Leaviss took advantage of the sell-off and added about 0.5 years of duration by buying gilts. An example was gilts maturing in 2051 with a yield of 5.5%.

Ariel Bezalel, Director of Jupiter Strategic Bond Fund, is concerned about the pace of interest rate hikes in a sluggish economic environment. He believes that further policy tightening from here through rate hikes and a gradual reduction will lead to an unnecessarily deep and painful global recession. Bezalel sees inflation falling and, with a recession, slowing even faster. Coupled with China’s weakening, he thinks there will be a pivot between fighting inflation and avoiding economic depression. This makes him overwhelmingly positive on high quality medium to long-dated government bonds in the US and Australia.