14 October 2022
The third quarter of 2022 (Q3) hasn’t brought any respite to investors, with global stocks and bonds continuing to fall in tandem. In USD terms, the MSCI AC World Equity Index fell 6.7% in Q3 and 25.3% year-to-date, while the FTSE World Government Bond Index declined by 7.6% in Q3 and 21.3% year-to-date.
But despite persistent inflation and growing recession concerns, our portfolios have continued to outperform their benchmarks year-to-date. Find out how our portfolios have performed in Q3 and year-to-date, and what we’re watching in Q4:
During Q3, StashAway’s General Investing (GI) portfolios returned between -4.3% and -7.2% in USD terms. On average, our GI portfolios outperformed their respective benchmarks by 0.9 percentage points in USD terms, though our higher-risk portfolios marginally underperformed during the period.
Zooming out to the year through end-September, all our portfolios have continued to outperform their same-risk benchmarks by between 1.5 and 7.7 percentage points in USD terms. On average, that's an outperformance of 4.6 percentage points.
The Fed’s rapid increase in interest rates to combat inflation weighed on the performance of both longer-duration and international bonds. That contributed to the bulk of the decline over the quarter, especially for our lower-risk portfolios. Rising rates also weighed on Gold, which declined about 8.2% over the period.
Few asset classes posted positive performance in Q3. Among those were US energy equities, which helped performance across our portfolios. Short-duration assets also saw positive returns during this period of rapid interest rate increases. As a result, US floating rate bonds (which are benchmarked to short-term interest rates and offer protection against rising yields), and US Treasury bills, also benefited our lower-risk portfolios in Q3.
For any General Investing powered by StashAway portfolio, there’s a 99% chance that you won’t lose more than your selected StashAway Risk Index (SRI) percentage in a given year. But in rare circumstances, portfolios can decline beyond their SRI level. This year, our lower-SRI portfolios, which have higher exposure to fixed income, saw declines that exceeded their SRI levels.
Why has this happened? It’s a general rule of thumb that bonds and stocks tend to move in opposite directions. So when stocks fall, bonds usually rise. But this year, the protection that bonds are meant to provide has been limited: markets have seen rare double-digit slumps across most asset classes due to rising inflation and rapid monetary tightening.
Just how rare is this drawdown for both stocks and bonds? In the last 40 years for which data is available, we haven’t witnessed such a synchronised drawdown in markets. And since our lower-SRI portfolios have higher exposures to fixed income, they’ve been more affected by the declines in bonds.
When are bonds likely to recover? The near future is likely to be challenging. The Fed has signalled that it may raise interest rates higher and hold them there for longer to stamp out inflationary pressures. During its September meeting, officials raised their projections of the fed funds rate to 4.6% in 2023 – another 150 basis points higher from where it currently stands.
What’s more, the latest inflation reading showed the headline reading cooling down only slightly (to 8.2% year-on-year in September) and the core gauge heating up (to 6.6%). With inflation still well above the Fed’s 2% target, that suggests the central bank may need to continue pressing ahead with aggressive hikes and potentially bring the fed funds rate even higher than projected. That would mean more bad news for bonds in the near term.
Is there light at the end of the tunnel? In the longer term, bonds should recover their losses if the Fed succeeds at reining in inflation, or if the US falls into a recession and the Fed starts cutting rates.
That's because bonds tend to do well in two scenarios:
in environments where inflation is under control, or
in recessions where central banks cut rates to support growth.
And, the Fed’s projections suggest its first rate cuts will come in 2024.
But there are still pockets of resilience in fixed income. For one, shorter-duration bonds – or those that have a lower sensitivity to changes in interest rates – have been a bright spot amid rising rates. Higher quality bonds – like investment-grade bonds, which have lower risk of defaulting – have also tended to better withstand a worsening macroeconomic environment.
It’s also important to note that bond yields are now at a decade high. For example, those for 2-year US Treasuries are above 4% – the highest since 2007. That compares with yields of less than 0.5% just 12 months ago. Given the challenging investment environment, those relatively higher returns make bonds more attractive to investors and should provide some cushion to further Fed hikes.
Our Responsible Investing (RI) portfolios, which focus on ESG, posted stronger performance in Q3. On average, our RI portfolios outperformed their benchmarks by 2.1 percentage points in USD terms.
From their launch in mid-January through end-September, that translates to an outperformance of between 1.4 and 7.8 percentage points in USD terms. On average, that's an outperformance of 3.9 percentage points.
As with our GI portfolios, short-duration assets – namely, US floating-rate bonds and ultra-short-duration government bonds – helped the performance of our lower and middle-risk RI portfolios in Q3. On the equities side, exposure to the future mobility sector and ESG-focused small-cap US companies were also sources of support during the quarter.
Pulling in the other direction, assets exposed to the Fed’s rapid tightening cycle, such as longer-duration and international bonds, and emerging market equities, dragged on performance.
Our Thematic Portfolios continued to post drawdowns in Q3. Soaring global inflation and rapid interest rate rises hit not only the thematic components of these portfolios, which are largely exposed to technology and high-growth stocks, but also their balancing assets.
As a result, our Technology Enablers, Future of Consumer Tech, and Healthcare Innovation Thematic Portfolios saw their lower SRIs – which have a higher exposure to bonds – exceed their SRI levels when looking at their returns since their inception last year.
That said, balancing assets still provided protection against steeper drawdowns. If you were purely exposed to the thematic assets in our Technology Enablers or Future of Consumer Tech portfolios, your portfolios would be down more than 50% to 60% in USD terms (versus about 30% to 40% with balancing assets). For Healthcare Innovation, they would be down 40% to 50% (versus 25% to 30%).
And despite these near-term headwinds from the current market slump, the structural trends behind these portfolios still show promise over the longer term. Continued innovation in these industries and their eventual mass adoption should continue to drive earnings growth over time.
Remember, thematic portfolios involve higher risk due to their concentrated sector exposure, so they work best as part of a broader, well-diversified portfolio. Always make sure your allocation to thematic investments suits your risk profile, and that you’re prepared to stay invested for the long term.
Our Technology Enablers portfolios posted an average fall of 6.9% in USD terms during Q3. That brought the average decline for the year through end-September to 34.4%.
These portfolios’ exposure to international bonds and autonomous technology and robotics weighed on performance during the quarter. But our allocations to blockchain-related stocks and floating rate bonds helped to offset those declines.
Our Future of Consumer Tech portfolios posted an average decline of 6.5% in USD terms during Q3. That contributed to an average decline of 35.2% for the year through end-September.
Of its thematic components, the gaming and eSports sector faced the biggest decline over Q3, while the exposure to international bonds was also dragged on performance. However, these portfolios’ allocations to the fintech sector supported performance.
Our Healthcare Innovation portfolios posted an average decline of 5.9% in USD terms during Q3. That brought the average decline for the year to end-September to 29.6%.
Here, the pharmaceutical sector dragged on performance over Q3, with international bonds weighing on lower SRI portfolios. Stronger performance in genomics stocks helped to offset those declines.
Our Environment and Cleantech portfolios continued to face much smaller drawdowns compared with our other thematic portfolios. During Q3, they posted an average loss of 3.2% in USD terms. That brings average declines to 13.4% since their inception in January to end-September.
Most components of these portfolios posted flat to positive performance during the quarter. However, the downward pressure mainly came from weaker performance in the global wind energy sector and green bonds.
Total Returns (%)
3 years (ann.)
5 years (ann.)
Since inception (ann.)*
80/20 US Universal/MSCI ACWI EUR/GBP H**
40/60 US Universal/MSCI ACWI EUR/GBP H**
20/80 US Universal/MSCI ACWI EUR/GBP H**
Very Aggressive Portfolio
100% MSCI ACWI EUR/GBP H**
Source: BlackRock, Morningstar as of 30/09/2022; Performance is based on USD total returns with income reinvested and net of total expense ratios but gross of transactions costs. Inception date is 1 Jan 2015. Past performance does not guarantee future results.
* Inception date for Conservative, Moderate and Aggressive models is 31/12/2014; Very Aggressive model at 31/10/2016
** Using Global AGG/MSCI ACWI until 31/12/2017, US Universal/MSCI ACWI EUR/GBP Hedged to USD after 31/12/2017
The multi-asset portfolios produced negative absolute returns in Q3, but outperformed their respective benchmarks - in relative terms - in the quarter as well as year-to-date.
In an environment where market volatility remained elevated, BlackRock’s ultrashort duration exposures continued to serve as an effective hedge against downside risk. Its position in floating rate bonds also contributed positively against a backdrop of persistent inflationary pressures, which, in turn, led to aggressive rate hikes by central banks. In relative terms, its underweight in high yield contributed positively to returns. Elsewhere in fixed income, its exposure to mid-to-long-term treasury hurt performance.
Within equities, allocations in both developing markets (DM) and emerging markets (EM) were detrimental to performance. Overweight allocations in the US and Canada hurt returns. BlackRock’s allocation in Min Vol had proven somewhat helpful, although absolute returns were still negative. Its relative underweight in EM, on the other hand, helped cushion some of the market downturn amid growth slowdown and currency weakness.
Performance of the Very Aggressive portfolio produced negative absolute returns, but outperformed the benchmark in Q3 and year-to-date.
From an absolute perspective, the majority of the equity market corrected as a result of a generally risk-off sentiment, elevated volatility, and a recessionary outlook. From a relative standpoint, BlackRock's underweight in emerging markets cushioned against losses, while its relative overweight in US and Canada hurt performance.
Click here for the Q3 reoptimisation commentary for our General Investing powered by BlackRock® portfolios.
As we head into the final quarter of the year, the latest signals from our investment framework, ERAA®, continue to point to high inflation and slowing growth:
In the US, inflation has started to show signs of easing, but it remains well above the Fed’s 2% target. Leading indicators of growth, however, have fallen into negative territory. Economists surveyed by Bloomberg forecast a 50% probability of a US recession in the next 12 months.
Elsewhere around the globe, inflation also remains high, while growth is slow but relatively stable. We do note, though, that there is a large divergence among economies. Europe is facing immense challenges from surging energy costs, while in Asia, re-openings from pandemic lockdowns are unleashing pent-up demand.
Markets likely face continued volatility amid the uncertain economic outlook. But investors who can stay invested through the uncomfortable periods of market decline stand to gain the most over the long term:
Looking at historical drawdowns of 25% or more in the S&P 500, we see that not only have markets always recovered, they’ve also delivered returns of 27% on average after a year. Push out your investment horizon to 5 or 10 years, and the returns look even more attractive.
And what’s the best way to weather a market downturn? Our Co-CIOs recommend making sure you have cash for your immediate needs, an emergency fund for any unexpected expenses, and that you keep investing the money you don’t need right now.
Arming yourself with a big picture approach and the right long-term investing strategy will help you reach your financial goals, regardless of the macroeconomic environment.
Our same-risk benchmarks are proxied by MSCI AC World Index (for equities) and FTSE World Government Bond Index (for bonds). The benchmarks we use have the same 10-years realised volatility as our portfolios.
Model portfolio returns are expressed in gross terms before fees, withholding taxes, and reclaims on dividends. They are provided only as a gauge of pure performance before other items.
Actual account returns may deviate from the model portfolios due to differences in the timing of trade execution (e.g. during the day vs close), timing differences and intraday volatility of reoptimisation and re-balancing, fees, dividend taxes and reclaims, etc. All returns are in SGD terms.
Past performance is not a guarantee for future returns. Before investing, investors should carefully consider investment objectives, risks, charges and expenses, and if need be, seek independent professional advice.
This communication is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to purchase any financial product or subscribe or enter any transaction.
This communication does not take into account your personal circumstances, e.g. investment objectives, financial situation or particular needs, and shall not constitute financial advice. You should consult your own independent financial, accounting, tax, legal or other competent professional advisors.
For StashAway General Investing portfolios that are powered by BlackRock, BlackRock provides StashAway with non-binding asset allocation guidance. StashAway manages and provides these portfolios to you, meaning BlackRock does not provide any service or product to you, nor has BlackRock considered the suitability of its asset allocations against your individual needs, objectives, and risk tolerance. As such, the asset allocations that BlackRock provides do not constitute investment advice, or an offer to sell or buy any securities.
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