While it may be too early to call this the bottom, some value is starting to crystallise in the longer-dated part of the market.
US and UK investment-grade bond benchmarks are down between 10 to 15 per cent year to date, and it is now increasingly possible to find very good investment-grade bonds at attractive valuations.
For this reason, we suggest selectively adding very high-quality credits with 4 to 6-year duration, which should benefit in an environment of decreasing inflation, slightly lower interest rate expectations, and even in a recessionary scenario should interest rates rise further from current levels.
On the flip side, if you are a firm believer that inflation stays sticky and rates move even higher, buying good-quality floating rate bonds and Treasury inflation-protected securities may be a good option.
However, it is important to note that they will not perform particularly well should this high inflation lead to a recession.
The equity market experienced even higher volatility this year, with some major developed market indices down between 12 and 25 per cent year to date.
However, there have been huge disparities between different sectors and individual companies.
Many high-growth technology companies with limited profitability/cash flow generation trading on high multiples have been hit the hardest and, in many cases, are down between 50 to 80 per cent from their highs, while more traditional and often more cyclical 'value' businesses have outperformed.
Some of the key beneficiaries of this value outperformance have been commodity/mining-exposed companies, but we would be cautious about this exposure going forward, as inflation leading to an economic slowdown would likely reverse the good performance of these stocks.
These large disparities have created interesting opportunities, particularly in certain growth sectors.
While we would discourage investments in speculative tech businesses, we believe several high-quality companies with wide moats and an ability to pass on inflation are now trading at attractive valuations and are a good addition to many long-term portfolios.
One may also consider a small allocation to alternative investments, especially select macro-focused strategies.
Macro hedge funds tend to be a good diversifier in difficult times, and they have proved their value again this year after posting positive returns year to date, beating many other asset classes.
Gold is another example of a diversifying asset, which tends to do well in market sell-offs as investors seek uncorrelated hedges and stores of value.
Emerging markets are likely to stay under pressure not only due to inflation and potentially slowing growth but also because of Covid disruptions lasting longer than in many other countries, as well as political uncertainties and social unrest induced by a significantly squeezed consumer.