The above performance chart illustrates how various asset classes have performed up until the end of August 2023. It shows the performance of some of our benchmark funds in each of the main asset classes.
Investment markets have delivered solid gains year to date, equities have driven most of the gains. It is encouraging to see that markets have stabilised after a difficult 2022. This is particularly heartening considering the many headwinds that still exist in markets such as continued inflationary concerns, geopolitical tensions, and instability in the banking sector.
Bonds have stablished year to date, with government bonds and corporate bonds exhibiting gains between 2% and 4% over the period. Volatility has remained high in bond markets as inflation has been stickier than Central Banks would like and, by association, interest rates have climbed higher than markets would have anticipated at the start of the year. We continue to believe that we are close to the peak in this current interest rate cycle and are optimistic that bonds returns will recover from this point. Indeed, if economic growth was to slow more than anticipated (not our base case expectation) it could create an even more positive backdrop for bond returns. Within our model portfolios we continue to hold a neutral stance on bonds and our medium-term growth expectation from this asset class is 3% p.a.
Property funds have generally moved lower, but the falls have been relatively modest and, in the case of the Standard Life UK Property fund, the returns have been mildly positive.
In the short-term, the headwinds of higher interest rates and an increasing focus on improving the ESG standards of buildings are leading to a challenging environment in commercial property. Notwithstanding this, we continue to believe that over the medium-term property and equities remain an effective method of protecting against inflation. This is particularly relevant as it is our expectation that Central Banks will struggle to get core inflation back to their targeted 2% and, as a result, we feel that inflation will be a bigger threat to portfolios than it has been for multiple decades. Although we recently reduced the weighting to property in our model portfolios, we believe that the headwinds this asset class faces will start to subside as we move into 2024 and we expect that property will deliver 5% p.a. over the medium term.
Equities have been the standout performer year to date, the MSCI World is up c. 14% (in euro terms).
The global equity exposure we hold has outperformed smaller company and emerging market equities. The year-to-date gains in global equities have been concentrated in a relatively small number of stocks with Generative Artificial Intelligence being a key driver of the overall positive performance of this asset class. To gain greater confidence in this recovery it would be preferable to see gains more broadly distributed across the market.
We continue to see merit in holding smaller companies and emerging markets equities on valuation grounds, albeit it may take greater confidence that economies are starting to recover before their value starts to be realised.
Multi asset funds have benefitted from the strong performance of equities. Added to this, the fact that bond markets have begun to recover has also provided a tailwind for multi-asset funds and has helped offset a weaker outcome for property and total return strategies.
Our house view remains optimistic for these multi-asset options, and we are happy for our clients to hold these funds on a standalone basis to achieve their desired risk return outcome.