A busy month in investment portfolios

A busy month in investment portfolios


Inflation

This continues to be the topic that dominates the discourse of central banks and, consequently, the behavior of financial markets. Since the crisis of subprime that financial assets have been “fed” by the liquidity created by the monetary authorities, in order to boost the economy. It is not surprising that the focus of investors is on actions and speeches of those who have the power to influence the rise or fall of interest rates.

The relevant fact is that much more than the negative influence that inflation has on the real economy, what is important for the financial markets is understand whether the trend of sharp rise in interest rates will continue or slow down. The idea has long existed that the worse the economic data, the better the behavior of assets, because investors perceive that the entities responsible for monetary policies will be more prudent when making difficult decisions, which in a simple way means that the fear of a recession could “force” central banks to take a step back from the plan they have defined.

Read also: Central Banks: Chasing losses

Liz Truss

In a month marked by several relevant events, the Liz Truss’ (expected) resignation as prime minister was an important milestone. No one had ever been in power for so little time in the UK. In just 45 days, and after the presentation of an economic plan that did not take into account the context we are going through, Liz Truss was forced to back down, mainly due to the pressure that the financial markets put on the United Kingdom.

ECB accompanies its “partners”

At its October meeting, the ECB decided to increase the reference rate by 75 basis points. Broadly speaking, in Europe, the reference rate is situated at 2%, still far behind the rises carried out by other entities with global importance, such as the Federal Reserve, which is currently at 4%, or the United Kingdom, which stands at 3%.

There are several reasons that justify the slower way in which the ECB is reacting in the fight against inflation. The first and perhaps the least discussed is that there are countries of considerable size with very high public debts and lower growth prospects. In these cases, an aggressive rise or the absence of support from the ECB could lead to a very complicated situation in the European bloc, with reflexes that are difficult to control.

Another argument has to do with the fact that the war between Ukraine and Russia is taking place on the European continent, which creates a greater economic and territorial uncertainty in Europe.

The absence of an effective union and a general consensus on the way forward on the part of the Eurozone countries creates greater difficulties when taking important decisions.

Read also: ECB announces new ‘jumbo’ interest rate hike. What’s the impact?

Consecration of XI Jinping in power

The Chinese Communist Party congress ended with the strengthening of Xi Jinping’s powers. This was a very important event and with impact on the behavior of emerging markets. The fear surrounding the team that will lead China, with members who are considered more radical and chosen by the current president, generated negative sentiment among investors, with doubts that China could adopt a more radical position internally and in the economy. global.

Investment Portfolios

With so many relevant events, the October trend has not been defined. The portfolios again ended the month negative, albeit with interesting particularities. In the bond segment, as inflation linked were the only positive assetswith all remaining exposure to bonds to have a negative contribution, which is justified by the aggressive rise in interest rates by the different global monetary authorities.

The most interesting was performance of the shareholder segment that had a positive behavior, with the exception of exposure to Asia, which ended up being heavily penalized by the way the Chinese Communist Party congress took place. The reason that justifies this good shareholder behavior is, once again, linked to the speech of central bank governors, who have been sending a message that the recent upward trend in interest rates may be more moderate in the future in depending on the degradation of the different economic indicators.

In general terms, the moderate portfolio corrected 0.99% while dynamic portfolio fell 0.63%.

Portfolio performance with moderate profile

moderate profile
Use: The returns presented do not take into account costs and taxes, namely custody fees and transaction costs. Net returns would always be lower than the gross returns presented.

The composition of the portfolio with a moderate profile

Portfolio performance with dynamic profile

dynamic profile
Use: The returns presented do not take into account costs and taxes, namely custody fees and transaction costs. Net returns would always be lower than the gross returns presented.

The composition of the portfolio with dynamic profile

Purpose of our portfolios

When, in March 2021, we created these two virtual wallets, our goal was always to knowing how to explain market movements and the influence they had on our portfolios. We have always had this concern, not least because investment is a process that lasts over time.

As an example, in May 2021, we reduced risk in the portfolios as we understood that the performance of the financial markets had no logical or rational justification. It took some time, but the reality is that our current positioning, despite having a negative performance, is better than the initial portfolio.

It is also important to note that throughout the trip or investment process there will be many fluctuations and moments of enormous volatility. the fundamental is to realize where we are invested and why. Realizing that in the midst of panic there are always opportunities, and having the rationality to distinguish and find quality assets. Because these, when everything calms down, will recover and generate return…

Use: Doctor Finance’s portfolios are not and should not be understood as advice to invest in this or that type of financial instrument. Our portfolios were created solely to illustrate the potential risks and benefits of investing, directly or indirectly, in financial instruments such as shares and bonds.


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