Investing in an era of higher interest rates and scarcer capital

WELCOME to the end of cheap money. Share prices have been through worse, but only rarely have things been as bloody in so many asset markets at once. Investors find themselves in a new world, and they need a new set of rules.

The pain has been intense. The S&P 500 index of leading American shares was down by almost a quarter at its lowest point this year (2022), erasing more than US$10 trillion in market value. Government bonds, usually a shelter from stocks, have been blasted: Treasuries are heading for their worst year since 1949. As of mid-October, a portfolio split 60/40 between American equities and Treasuries had fallen more than in any year since 1937. Meanwhile, house prices are falling everywhere from Vancouver to Sydney. Bitcoin has crashed. Gold did not glitter. Commodities alone had a good year – and that was in part because of war.

The shock was all the worse because investors had become used to low inflation. After the global financial crisis of 2007 to 2009, central banks cut interest rates in an attempt to revive the economy. As rates fell and stayed down, asset prices surged and a “bull market in everything” took hold. From its low in 2009 to its peak in 2021, the S&P 500 rose seven-fold. Venture capitalists wrote ever bigger cheques for all manner of startups. Private markets around the world – private equity as well as property, infrastructure and private lending – quadrupled in size, to more than US$10 trillion.