Fund Return 2021 - 2022

Fund return to 31st May 2022

Investment Commentary

Provided by Mercer - CERS Investment Adviser

Market Developments

Equity markets sold off heavily in June after US inflation came in above expectations, which prompted the Federal Reserve to hike its overnight rate by 75 basis points. Economic data hinted at a slowdown and led to increased recession fears. The equity sell-off was broad based with growth outperforming value. The only equity market with significant positive returns was China where a potential end of lockdowns and supportive monetary policy helped sentiment.

Bond returns were also negative as central bank tightening and high inflation pushed up rates at the longer end of the curve. Credit spreads also rose in this risk-off environment which led to poor performance for growth fixed income. Gold returns were also negative for the month on the strength of the dollar and its implicit real duration exposure.

Commodities also sold off, as investors positioned for the possibility of commodity demand slowing if a recession were to occur. Crude oil finished the month at $105.76, down almost 8% in June. REITs declined along with the equity market as the US housing market continued to show signs of cooling.

US inflation came in above expectations, influencing the Federal Reserve’s decision to raise rates by 75 basis points. Inflation for other regions such as the UK, Eurozone and Australia was also elevated and it exceeded 2% in Japan. Inflation expectations remained stable in the US and fell substantially in the UK as central banks continued to hike aggressively and expressed their commitment to tackling inflation, even if tightening increases the risk of a recession.

The conflict in Ukraine raged on as Russia expanded its territorial gains in eastern Ukraine. Restrictions on Russian energy imports to Europe were tightened, exacerbating the energy shortfalls there and leading to fears of rationing later in the year.

The US dollar strengthened against major currencies, partly due to US monetary policy tightening at a faster pace than in other developed countries but also due to safe haven flows. The cryptocurrency sell-off continued. Bitcoin fell by 40% during the month and closed at a two-year low.

Outlook

As we make our way through 2022, it has become ever more apparent that a sustained period of central bank rate hiking is upon us. Major western central banks, such as the Federal Reserve (Fed) and the Bank of England (BoE), have already hiked rates. The European Central Bank (ECB) has begun to taper asset purchases and has signalled further action to come. Looking ahead, the US yield curve is forecasting a sharp hiking cycle unlike any in recent memory. Combined with Russia’s invasion of Ukraine, the impact on portfolios due to the market's reassessment of future interest rates has been anything but subtle. Year-to-date, global equities, measured by the MSCI ACWI, are down nearly 13.3% (measured by MSCI Word Index), while bonds, measured by the Merrill Lynch Euro >10 Year Bond Index are down 22.8% as of the end of June.

The change in rhetoric from the Fed, along with a broad sell-off in markets, has spooked investors who fear that the looming series of rate increases will lead to further market weakness. However, every rate hiking cycle is different, and so too is the magnitude of the market reaction. Our key observations from historical rate hike cycles are two-fold:

• Not all tightening cycles occur at the same pace, with swift hiking cycles historically resulting in worse market returns;
• Central banks, particularly in the US, are embarking on this hiking cycle from a far more extreme position than in the recent past.

Given the uncertainty on the path and outcome of this hiking cycle, it is important that investors ensure their portfolio diversification and governance processes are robust.

First, having diversified return drivers helps to make portfolios robust to a wide range of plausible future scenarios. Second, strong and nimble governance sets investors up to make decisions quickly as we gain more clarity in this highly dynamic market environment.

Notes

• Scheme Year to date performance is the period from 1 June 2021 to the most recent month shown.
• Performance shown is net of annual management charge.
• The investment choices offered by the Trustee will be regularly reviewed and may be varied from time to time.
• Before you choose a fund we recommend that you speak to a financial adviser. The CIRT Trustee preferred financial adviser is Milestone Advisory DAC.  You can contact them or your own financial adviser to assist you to review your investment choices. You can contact Milestone Advisory DAC via the website www.milestoneadvisory.ie, by post: Linden House, 4 Clonskeagh Square, Clonskeagh Road, Dublin 14, D14 FH90, by email [email protected] or by phone (01) 4068020. Milestone Advisory DAC t/a Milestone Advisory is regulated by the Central Bank of Ireland.
• If you require further information please contact the CIRT Team at [email protected]