Risk assets came under significant pressure in the first quarter of 2022. Concerns over inflation and the indication from central banks that they will aggressively increase interest rates initially drove markets lower, followed by the invasion of Ukraine by Russia. Both equity and, perhaps more importantly, fixed income indices saw significant losses. The Barclays Global Aggregate Index is experiencing its greatest drawdown since inception, whilst US treasuries saw their worst quarter since 1973.
Inflation continues to vastly exceed targeted levels and central banks seem to have found religion and realise they must act to bring it down. Narratives over inflation being transitory, a result of corporates profiteering and overall being a benefit as it was leading to wage increases for the poorest, have all subsided to the need to do what is necessary to bring inflation down. Central banks around the world are behind the curve and the question is how high interest rates need to rise and the consequences on the broader economy and markets. Clearly, central banks want to avoid a recession, but historical precedence is against this occurring.
All of Stenham’s strategies bar equity-related strategies were positive in Q1, with the strongest performers being those within discretionary macro. This is encouraging given the difficult market for almost all asset classes during the period. Our portfolios’ performance depended upon overall exposure to equities. Portfolios with limited beta to equities generating positive performance. We believe the current environment, with uncertainty over the path of interest rates and strength/direction of economic growth, continues to create an attractive opportunity set for alternative strategies, both in absolute and relative terms.