September 2022


The Good: Bonds Have Become Attractive

2022 has seen global central bankers increase interest rates materially, resulting in a dramatic spike in yields. This, in combination with a period of elevated economic uncertainty, and therefore widening credit spreads, has resulted in a “double whammy” for bond investors who have experienced the worst year in bond investing since the creation of the Bloomberg Aggregate Corporate Bond Index (“BACB Index”).

Source: Bloomberg

Within times of crisis comes great opportunity, and although bond investors will be licking their wounds after a torrid 2022, they will know that historically poor years have tended to be followed by really good years in bond markets. This is because a narrative change has tended to occur, where central bankers turn less hawkish, and declining interest rates begin to be priced into markets. Since the inception of the BACB Index, the total return in a year following a downturn has never been negative. After more than decade of unappealing yields, investor appetite for the asset class has begun to tick up, with many global bond indices having seen large inflows in recent weeks.

In fact, spreads and yields have increased to such an extent that Scott Minerd of Guggenheim said the current bond market has provided “perhaps the greatest investing opportunity of a generation”. We have been taking advantage of this opportunity, increasing our exposure to bonds in the Global Balanced Fund from 0% to 15% in recent months.

The Bad: The Dot Plot

The Bank of America Fund Manager Survey, released in the middle of July, revealed an exceptionally bearish stance from global money managers. Allocations to cash increased to levels not seen since 2001 while exposure to equities fell to levels not seen since 2008. 58% of survey participants stated that they are taking lower than normal risks, a record that surpassed levels seen during the Global Financial Crisis of 2008. Selling pressure emanating from these bearish viewpoints has caused significant losses for the year in capital markets with major indices such as the S&P 500 being down more than 15% year-to-date. In recent months, concerns of a potential recession have emerged, with the survey indicating that nearly as high a percentage of managers are predicting recession as was the case in April 2020 and March 2009

Source: Federal Reserve September 2022 Summary of Economic Predictions

The “dot plot” is a graphic utilised by Fed officials to illustrate each individual member’s interest rate outlook. The updated “dot plot” from the recent September Fed meeting shows that the median short-term interest rate for the end of 2022 now sits at 4.4%, up from 3.4% anticipated in June 2022. The graphic also illustrates that Fed officials expect the target rate to peak at around 4.6% towards the end of 2023. This is an increase of 0.66% on the guidance provided just 3 months earlier, a move which shocked markets into postponing the date of a Fed policy pivot, and prompted them to adjust equity valuations accordingly.

Fed Chair Jerome Powell emphasised that history cautions strongly against a premature loosening of policy, and despite further rate hikes bringing some pain to households and businesses, the market can expect that rates will be higher for longer to curtail price levels and restore a longer-run annual inflation goal of 2%.

& The Future of Design

Adobe made headlines in recent weeks after they announced that they would be buying collaborative design company Figma for $20bn in cash and stock, the largest amount ever offered for a private US tech company. Founded in 2012 by two college dropouts, Figma pioneered design software that runs directly on the web browser (for an overview click here). Built specifically around ease of use and the collaboration of multiple users in real time, it has rocketed in popularity in the last few years with a 2021 survey showing them dominating 77% of the User Interface design market. Most notably, two thirds of their 4m users identifying as something other than a “designer”, with project managers, engineers, marketers, and data scientists all using their collaboration software.

Source: Figma

Although the price tag is eye-watering at a time when company valuations have generally been decreasing, we believe the acquisition opens up a massive new market opportunity for Adobe. Figma’s disruptive tools and attractive price points have earned them a loyal following across the marketplace, from students all the way to corporations like Microsoft. In fact, Microsoft’s reliance on their software is so great that Jon Friedman, VP of design and research, recently said that Figma is “like air and water for us”. Although likely to face some integration challenges, Adobe’s management team have proven themselves to be shrewd operators in the past when they successfully switched from perpetual licensing to a subscription revenue model.

With this acquisition Adobe is securing a younger generation of customers who create quickly and collaboratively; customers who will continue to define the future of design. The company is the cheapest it has been in years, and with fundamentals at the core business remaining robust we are looking to add to our position at these levels.

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