The macroeconomic climate has been battered this year, prompting investors to seek extra advice
It has been a particularly tough year for investment for a range of reasons, including inflation, the war in Ukraine, the energy crisis and supply chain issues.
To my knowledge, commodities has been one of the very few asset classes to perform well in 2022.
Early in the year we saw debates about investment style rotation from growth to value. While the 2010s had favoured growth strategies, persistent inflation following the reopening of economies after Covid brought value back to the forefront.
Russia’s invasion of Ukraine poured fuel on the fire of a challenging macroeconomic climate. It also made investors question the rigidity of environmental, social and governance (ESG) metrics.
While the defence sector was undesirable for investors, the conflict sparked debates about the definition of ESG. Some sectors, such as the arms industry, are not compatible with the three risk factors but are necessary evils.
Although the UK market has been cheap for years and offers a tilt towards value, it has remained unloved
ESG actually fell from grace this year. Research from the Association of Investment Companies shows private investors are more pessimistic about it: while 65% considered ESG when investing last year, the figure fell to 60% in 2022. Investors are also more sceptical. Of those who do not consider ESG, 55% are unconvinced by ESG claims, compared to 27% in 2021.
Across the pond, ESG has become a political battleground between Republicans and Democrats. Now the mid-term elections are over, we shall soon see if the Republicans’ crusade against ESG continues.
In any case, here the Financial Conduct Authority has proposed a package of measures to clamp down on greenwashing. The regulator is looking to establish new rules around sustainability, which may be a UK equivalent of the EU Taxonomy.
This year there have been more discussions around the viability of the 60/40 portfolio. It seems this debate has gone on for years, with no definitive answer.
Investors will need advisers’ help to mitigate their tax liabilities
However, bonds appear to be back in fashion. In a piece for Money Marketing in September, RLAM head of multi-asset Trevor Greetham made the case for overweighting a portfolio towards sovereign bonds.
Fiveways Financial Planning director Chris Gilchrist also called on investment managers and advisers to add bonds to portfolios “to stabilise returns and reduce portfolio drawdowns”.
Nonetheless, UK sovereign bonds (also known as gilts) experienced turmoil following September’s mini-Budget as yields surged to levels unseen since 2018. It prompted the Bank of England to intervene, stating that the pressure in the gilt market was putting the UK’s financial stability at risk.
Persistent inflation following the reopening of economies after Covid brought value back to the forefront
While the UK market has been cheap for years and offers a tilt towards value, it has remained unloved. In fact, UK funds were responsible for 70% of ‘dog funds’ in Bestinvest’s Spot the Dog list.
For venture capital trusts (VCTs) and the Enterprise Investment Scheme (EIS), 2022 has been a good year in many regards. The wish of industry participants to see the sunset closure scrapped has been fulfilled.
VCTs and the EIS were meant to stop in 2025, but former chancellor Kwasi Kwarteng announced in the mini-Budget they would be safeguarded beyond that date.
With £1.13bn gathered in 2021/22, VCTs experienced a record in funds raised in a single tax year since the launch of the scheme in 1995/96. At 20 October 2022, VCTs had raised £201m, compared to £237m gathered at that point last year.
Commodities has been one of the very few asset classes to perform well in 2022
However, with the changes to taxation announced in the Autumn Statement, both VCTs and the EIS could see a surge in interest due to the tax relief they offer.
New chancellor Jeremy Hunt reduced the capital gains tax allowance, from £12,300 to £6,000 in April 2023 and then to £3,000 in April 2024. Hunt also halved the tax-free allowance on dividends from £2,000 to £1,000 from next year. In April 2024 it will be further reduced to £500.
Those measures are bad news for investors, who will need advisers’ help to mitigate their tax liabilities.