The return on LD Discretionary, which is the largest investment fund within The Cost-of-Living Allowance Fund, stood at a negative return of -4.7% on 4 May 2022. Over a 36-month period, the portfolio has generated a positive return of 9.1%. Unsurprisingly, the return on the employees' holiday allowance fund is also negative. As at the end of April 2022, it stood at -4.8%.
Negative returns are currently affecting all investors and are due to rising interest rates, falling stock markets, rising inflation and the war in Ukraine.
Rising interest rates and falling stock markets
Since autumn 2021, rising interest rates and falling share prices have characterised the financial markets.
The yield on US 10-year government bonds has risen from 1.73% to 2.97% in just two months. The yield on a German 10-year government bond has risen from -0.08% to 0.95% over the same period. These are the largest rises in interest rates over such a short period in several decades. When interest rates rise so sharply, this leads to correspondingly large falls in bond prices. In the Danish bond market, convertible mortgage bonds have had a difficult start to the year. LD Pensions historically holds a high proportion of Danish mortgage bonds in its portfolio, which has had a negative impact on the overall Return in the first few months of the year.
Since the start of 2022, the OMXC25 index has fallen by 12.1%, and global equities, as measured by the MSCI World Index, have fallen by 13.8%. However, US technology shares, represented by the NASDAQ index, have been hit hardest, falling by 20.4% in 2022.
Inflation makes it difficult to strike a balance in monetary policy
The US labour market is under pressure. Unemployment in the US continues to fall and currently stands at just 3.6 per cent. In the eurozone, unemployment is also falling and currently stands at 7.2 per cent, albeit with greater fluctuations. In Germany, unemployment has fallen to 5 per cent. Low unemployment suggests that the underlying economy is strong. Leading indicators of growth in the manufacturing sector in both the US and the eurozone remain high, although recent months have seen a decline. The services sector remains strong, and the vast majority of companies’ financial results for the first quarter of 2022 have been positive.
The main reason for the fall in share and bond prices is rising inflation. The Consumer Price Index in the US rose by 8.5% in March. In Germany, the consumer price index rose by 7.3% over the same period. Such rises in consumer prices have not been seen since the 1980s. This has presented central banks with a difficult challenge. Both the US and European central banks have strongly signalled that they are prepared to raise interest rates, which has pushed up both short- and long-term interest rates.
Historically, the stock markets have never taken kindly to the combination of rising inflation, rising bond yields and central banks tightening monetary policy. This is the reason behind the falling stock markets. The war in Ukraine and rising tensions between Russia and the West are contributing to further instability. Finally, new outbreaks of Covid-19 in China have led the Chinese authorities to impose large-scale ‘lockdowns’ even on major cities and ports. This has slowed the shipment of goods to both Europe and the US. It is having a negative impact on economic growth in China and, at the same time, creating bottlenecks in the goods markets in Europe and the US. This is being felt in the form of rising prices for both goods and food.
One of the central banks’ most important functions is to keep inflation stable. Rising inflation therefore calls for a tightening of monetary policy. As mentioned earlier, a tightening of monetary policy is not something the financial markets are keen on. Many even fear that tightening will lead to a general slowdown in economic growth; there is even talk of a recession. The outlook is therefore less positive for both shares and bonds, and it must be expected that global financial markets will continue to be characterised by significant price fluctuations.
However, the main portfolios at LD Pensions are highly diversified and have a long investment horizon, which bodes well for future returns.
One organisation – two foundations
LD Pensions manages both the accrued cost-of-living allowance funds and the accrued holiday allowance funds. LD Pensions has a broad investment portfolio, in which a joint investment arrangement between The Cost-of-Living Allowance Fund and The Holiday Allowance Fund ensures low costs and access to expert investment advice in all key areas. The two funds have the same ‘building blocks’ in which to invest, but each invests with different weightings across these ‘building blocks’.
