What is in store after the correction?

12 Oct 2022

Dear investors,

Developed market equities had a difficult run so far. Rising inflation, the continued Russian invasion of Ukraine, interest rate increases by central bankers and concerns about growth prospects all contributed to declining equity valuations. As a result, global equities lost another 7% in September, bringing their year-to-date drawdown to about 14% so far.

So, while global equities already crossed the 10% losses border back in June, they are now well on their way towards a 20% drawdown. In this article we will explore how, historically, global equity has fared after a maximum drawdown of respectively 10% and 20% with regards to their most recent 3-year peak.

(*) The forward 3Y-return is annualized to allow for comparison with the T-bill rate.

Starting with a 10% drawdown it is obvious that equities tend to rebound quite nicely in the subsequent months and years. In about two thirds of the documented cases your portfolio would have at least partially recovered from the drawdown. Looking ahead three years into the future there has only been one period since the seventies where equities did not recover substantially from a 10% drawdown (2000). When taking into account the ‘safer’ alternative (i.e. switching your equity investment to T-bills), the view becomes more convoluted: there were clearly some periods where rebalancing your portfolio away from stocks to T-bills would have netted a larger gain over the following years (i.e. 1973, 1987, 1990, 2000, 2008) and this while substantially reducing volatility.

(*) The forward 3Y-return is annualized to allow for comparison with the T-bill rate.

Whilst there are obviously less cases to make a good statistical point, when looking at larger drawdowns (>20%) the view starts being uglier. In the majority of the cases global equities tended to incur additional losses over the subsequent 6 months or year. Over longer periods equities tend to perform similar to T-bills at best… With this in mind, we gladly point out that you can always switch your assets from Vector Navigator to Vector Flexible, where we try to take this hard market timing decision for you.

Our funds continue to hold their own in 2022. Vector Navigator lost 9.8% so far, comparing favourably with the competition (-15.5%). Vector Flexible is enjoying a nice combination of a good stock selection, low duration risk and successful market timing this year. As a result, the fund is down just 3.6%, which equates to an outperformance of about 10.0% with respect to its Morningstar category.

Best regards,

Werner, Thierry & Nils