Global equities take a hit as investors craving stability put bonds back on the list

A year is a long time in markets and things change quickly, but I can’t remember a time in my career - other than during the GFC - when things have changed so dramatically in such a short space of time.

Against this backdrop we reached out to the Livewire audience (we love hearing from you!) to gauge how the market is impacting the way you are investing. 

The diversity and depth of opinion and insight is incredibly valuable and I’d like to thank everyone who participated in the 2022 Income Series survey.

In chatting with numerous fund managers ahead of the Income Series launch, they have also acknowledged the rapid change in markets. These are people who have been in the industry 20-30 years plus, and who can’t recall a time in the market where things have moved so swiftly – particularly bond yields and interest rate expectations.

2022 Income Series Survey Snapshot

• 830 people surveyed
• Funding Retirement (76%) and replacing primary income due to a career break (31%) were the two main reasons for income investing
• 53.7% of participants are seeking income of between 4 - 6% per annum (similar to last year despite rising inflation)
• 72% of participants said they are willing and able to draw on capital to support income requirements (similar to last year despite volatility)
• 22.3% of participants said they are likely to increase their allocation to term deposits in the next 12 months.
• Domestic equities 68% remain the most-popular asset class, however, interest in global equities has fallen from 55% to 36%.
• REITs (19%) Infrastructure (18.9%), Bonds (12.7%), Alternatives (11.6%) and Private Debt (11.1%) are also on the shopping list for investors.
• The percentage of investors planning to allocate to corporate and government bonds has more than doubled compared to 12 months ago
• The three biggest concerns for participants are inflation, recession and geopolitical tensions
• 4% is the tipping point where readers start getting excited about allocating to term deposits 

Perhaps the best way to highlight the change is the responses to the question around the biggest concerns in the broader market.

Five big concerns for income investors in 2022

This time last year it was overvalued stock bubbles, geopolitical environment, the global debt burden and Covid-19 waves and lockdowns (which didn’t get a look in this year). For reference, inflation was number five on the list in 2021, whilst interest rates was number six on the list.

Whilst some things changed, some things also stayed the same, which, depending on how you look at it, might provide even more profound insights into the minds of investors. 

Broadly speaking, people have lowered expectations and are willing to accept slightly higher risk to achieve their income goals. 

The biggest changes have been around which asset classes will be used to achieve said goals - more on this below.

WHAT STAYED THE SAME?

• 53.9% of participants are seeking income of between 4 - 6% per annum. Somewhat surprisingly, this is a similar outcome to last year despite much higher inflation.
• The big change in responses to this question was in people looking for income of 10% or more. 11.2% this year, down from 14.5% last year = lowered expectations amid a tougher environment. 

• 72% of participants said they are willing and able to draw on capital to support income requirements, down only slightly from last year’s 76%

WHAT CHANGED?

Additional Risk

There were some noticeable changes in the amount of risk people are willing to accept to achieve higher levels of income.

Last year, 65.1% said they would accept a moderate increase, whilst this year only 62.7% said they would accept such an increase. In and of itself, that looks like people are willing to accept less risk overall, but understanding which group those respondents shifted to is telling.

Last year only 2.9% of people said they would accept a significant increase in risk. This year, it was 5.6% - almost double.

Capital Stability

The importance of capital stability saw some interesting shifts across the responses.

• In 2021, 60% of people said capital stability was important but they could handle a small amount of volatility. In 2022, that jumped to 62%.
• In 2021, 15.2% of people said they care more about the level of income being delivered than capital stability. That fell sharply to 5.5% in 2022 - with greater volatility, more people have become concerned about capital stability.

Desired Asset Class Exposure in the next 12 months

• Domestic equities 68% remain the most-popular asset class and consistent with last year’s 69%
• Interest in global equities has fallen from 55% to 36% - probably the most seismic shift we saw in any of the data points in the survey and a strong reflection of the volatility seen in US equity markets since January
• Interest in government bonds more than doubled – from 3.6% to 8.4%
• Corporate bonds jumped from 7.5% to 12.7%
• REITS and listed infrastructure remained consistent around 19% and 20%, respectively
• Alternatives (11.6%) and Private Debt (11.1%) were also on the shopping list for investors

NEW INSIGHTS

We added a couple of new questions this year. One that we’re particularly excited about, and to which we will dedicate an entire wire, is what has been a reliable income fund/ETF or stock in your portfolio? Keep an eye out in the next week or so for that update.

The other questions related to interest rate expectations, and what rate of return would get you excited about investing in terms deposits.

• Most of you expect the RBA cash rate to be in the 2.65-3.05% range by January next year.

• 22.3% of participants said they are likely to increase their allocation to term deposits in the next 12 months, and a 4% return on a TD is the tipping point where people start getting more excited 

Livewire’s 2022 Income Series is going to be a cracker!