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If you haven’t had the chance to read our full Strategic Asset Allocation document just yet, our Investment Advisory team has picked out their favourite charts and analysis from this year’s presentation for you.
First up, a key theme in recent times: inflation.
Record inflation
From the following graph, we can see how it has spiked abnormally in recent times compared to the average of the last 20 years (and even beyond). 
As can be seen on the chart, before retracing, inflation reached the highest level in the last 40 years.
The spike in inflation and its subsequent slowdown have been the metronome that
has marked the rhythm of the markets in the last 12 months. Central banks have faced an unprecedented scenario and have had to ‘test’ their arsenal of policies to see if they were indeed capable of controlling price dynamics.
Interest rates, the main tool available to central bankers, have been raised at an unprecedented pace, as can be seen from the chart on the following page. Not only that, but the monetary tightening has also been accompanied by rather tough rhetoric, aimed at emphasising absolute determination in waiting for unequivocal signs of a price slowdown before considering a reversal of monetary policy.
Are we expecting a new era in bonds?
Some investors are so enthusiastic about the prospects of this asset class that they argue that their entire portfolio should be repositioned according to the bond component. Even many retail investors, as data shows, are increasingly drawn to the apparent promise of what they mistakenly consider to be ‘guaranteed returns’ and are turning with interest towards new bond issuances.
At Moneyfarm, we do not agree with this approach. Diversification remains incredibly important. Although the return prospects for bonds are improving, equities continue to offer better-than-expected returns than the long-term equilibrium rate (6.8% per year for the next 10 years for developed countries).
Rather than a new era, we believe that this interest rate context represents a “new normal”, with positive levels finally able to compensate investors’ risk. However, it’s important to remember that bonds come with risks and perform best when they are diversified and balanced with other asset classes that can enhance the risk and return profile of investments.. The dynamics of prices, the level of interest rates reached, and the narratives of central banks suggest that we have finally reached the peak of rates, creating a favourable environment for bonds to rebound.
Expected returns for fixed income
Source: Moneyfarm Research, data as of 31 December 2023. Expected returns of various asset classes according to Moneyfarm’s strategic asset allocation. Projections are never a perfect predictor of future performance, and are intended as an aid to decision-making, not as a guarantee. Expected returns are estimates of average annual returns for the next ten years. Expected returns are gross returns. Actual returns may be lower due to the costs and charges associated with investing in these instruments.
Performance
From a performance perspective, 2023 rewarded investors with positive results. Moneyfarm ESG model portfolios generated returns ranging from 4.4% to 12.8% depending on the risk level. Remembering that past performance is not a reliable indicator of future performance, below we can see the performance extrapolated with longer time horizons.
Portfolio performance as of 31/12/2023. The 5-year performance of the portfolio was simulated before the launch date on 01/10/2021. The data is presented for illustrative purposes only, and past performance and simulated past performance are not a guarantee of future results. Data provided shows gross returns. Actual returns may be lower due to the costs and charges associated with investing in these instruments.
Equities took the lead. The ESG ETFs we use to invest in the US equity, Eurozone equity, and UK outperformed the generic index, while for other geographical regions, although still positive, equity performance was lower than the classic counterpart. The fixed-income component also contributed positively to the overall performance. In 2023, we still witnessed, albeit to a lesser extent, greater sensitivity of ESG portfolios to movements in interest rates, driven by a higher exposure of equities to growth and small-cap factors.
A rebound year for investors
2023 was a very positive year for those who chose to trust the market by staying invested. Stock markets recovered from the heavy losses incurred in the previous year, and at the end of the year (on 12 January), the American stock market reached record heights. From the market’s recent low, it took 426 days to recover from a 24.4% correction (29 December 2023). This may seem like a long time to investors who saw their portfolios turn negative, but it is a shorter recovery period than many past crises, as can be seen from the chart below.
Investing your entire portfolio in equities could be risky. Even though the market took as little as 100 days to recover from some of the biggest financial crises of the past, recovery can take longer. Be careful, though: if you are already invested you don’t want to miss the positive returns during the rebound.
Past performance is not a reliable indicator of future performance. Data provided shows gross returns. Source: Moneyfarm Research, Bloomberg Data
A step of growth
Also, because long-term financial returns are built with patience, through continuous market participation aimed at benefiting from a limited number of positive sessions. As shown in the chart, which takes into account the performance of American stocks over the last 20 years, missing 10 of the best performance days, which usually occur within 15 days of the 10 worst days, can almost halve the cumulative result of an investment journey.
Past performance is not a reliable indicator of future performance. Annual performance of a portfolio invested 60% in the S&P 500 index and 40% in 10-year US Treasury bonds (total return). Source: Moneyfarm Research.
The darkest hour always precedes the dawn
The chart shows the annual return of an investment in the S&P in a 20-year period (January 2002 – January 2022) and focuses on some of the best days in the market. It highlights how performance would be impacted by missing the best days for markets – and therefore how important it is to stay invested, even during difficult periods. Source: Moneyfarm Research
Ultimately, no one can predict with absolute certainty the market performance over the next 12 months, but we believe that history shows that staying invested and having confidence in the growth potential of the stock markets is a good idea. The expected long-term returns, which are currently positive, can further reassure that there is still a path for growth and that the strategy of pursuing a long-term investment plan can continue to be a successful choice.
Expected returns and historical performance
The long-term expected returns for 2024 are generally quite high, with emerging market equities continuing to be the asset class with the greatest potential. The equity risk premium, which is the extra return paid by equity investments compared to bond investments, is lower than last year, standing at around 3% (compared to 5%).
Long-term bonds provide no extra return compared to last year. While the returns
of inflation-linked bonds and nominal bonds appear to be the same. High returns are expected for investment-grade bonds, while high-yield returns are less attractive compared to emerging markets.
You can read the full version of our Strategic Asset Allocation for 2024 here at any time.
Source: Moneyfarm Research. Past performance is not a reliable indicator of future performance. Projections are never a perfect predictor of future performance, and are intended as an aid to decision-making, not as a guarantee. Data provided shows gross returns. Actual returns may be lower due to the costs and charges associated with investing in these instruments.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
