Please find below our Investment Market Update as at 9th December 2022.
Looking to the future
We have recently changed the name of our Infrastructure portfolio to the ‘Future World’ portfolio. The core holdings will still be orientated towards infrastructure, albeit sustainable infrastructure, but we wanted a wider remit, allowing us to benefit from what we believe is coming down the tracks.
We are also looking to the future in the form of our Global Themes portfolio which seeks to embrace innovation.
An article this morning in Bloomberg, by Merryn Somerset Webb, reinforced our logic. He said “the next few decades will be about building energy assets, new manufacturing capacity and updating electricity grids. Think capital expenditure and industrial super cycle”. Somewhat different to the last 20 years where the lack of investment and a focus on globalisation has left many countries vulnerable.
Sustainability will become embedded
Sustainability stocks have taken a back seat this year with the so-called ‘dirty’ industries like oil, gas and mining attracting investment capital. However, the nod towards sustainability is not a fad and in time, not having a responsible sustainable policy will leave businesses dangerously exposed as consumers and businesses become more selective as to who they buy from. Everyone is becoming more accountable, and regulation will mean that business will have to more accurately demonstrate their ESG credentials (Environmental, Social, Governance).
Of course, the changing of the guard will present tremendous opportunities. There was an interesting article in Investment Week airing the views of Fidelity who highlighted five key themes:
- Clean energy
- Financial inclusion
- Healthcare innovation
- Improving resource intensity
- Infrastructure decarbonisation
They go on to say that it’s important not lose sight of these powerful structural drivers in times of higher volatility.
Investor optimism has improved
There is no doubt there is more optimism across investment markets as the recent rally suggests, but the landscape is still littered with uncertainty. Despite the recent recovery, the MSCI All Country World Index is on track for its worst year since the global financial crisis in 2008.
US stocks posted back-to-back gains in October and November, despite the downbeat economic sentiment. This has been the first monthly streak of gains since 2021, LGT Wealth point out. The rally has been largely driven by lower-than-expected inflation data and the potential for interest rate hikes to be reduced through 2023.
The jobs market in the US remains resilient and the US services sector picked up in November. Good news in one way as it shows that the economy is resilient but, in another way, it’s bad news because this data suggests that interest rate hikes may have to continue to take the heat out of the economy and dampen wage inflation.
Bloomberg Economics provided an update on the latest US inflation sentiment and comment that in November, inflation was most likely 7.2%, slowing from 8% in October. Inflation, they say, is easing thanks to cooling domestic and international demand, improving supply chains and the strong dollar.
Interestingly, here in the UK, Bloomberg also reported that the pace of hiring and pay growth slowed in November as companies became more reluctant to take on permanent staff. A loosening of a tight job market will help the fight on inflation.
These are just a few of the indicators which are fuelling optimism for the investment markets, whilst recognising that inflation could undergo a resurgence this winter and corporate earnings could deteriorate.
Will there be a soft landing?
The looming global recession could be the most signposted in history says LGT Wealth. The question they pose is whether the investment markets have become overly optimistic of late about there being a soft landing in 2023, or are there genuine reasons to believe this?
The US economy remains robust
The latest nonfarm payrolls data has continued to paint the picture of a strong US jobs market, adding an average of 329,000 jobs this year while the unemployment rate now sits at just 3.7%. Though many see this as a sign that the Federal Reserve (Fed) will have no choice but to maintain their pace of interest rate increases to cool the economy, it also provides evidence that a soft landing could be achieved given the strength of the labour market.
Goldman Sachs’s latest macro-outlook also points to this, predicting only a 0.5% increase in the unemployment rate by the time the Fed stops hiking and inflation settling at 3% by the end of 2023. Should this scenario play out, then the US consumer will remain in good shape, despite savings buffers falling through this year. However, one data point does not make a trend, so we will continue to watch key data points intently.
The case for China
It has been a tumultuous few months for China following President Xi Jinping’s re-election and extensive protest against zero-Covid measures. However, there is the prospect for further loosening of restrictions, as a result of such unprecedented unrest.
There has already been a relaxation in travel restrictions, and in the last week, several key cities scrapped the need to produce a negative Covid test to access public venues. A reopening of China and subsequent easing of supply chains will be a key stimulus to global growth. It appears that we are approaching the beginning of the end of Covid restrictions in China, even if the journey from start to finish is likely to be complicated and volatile. Whilst the timeline for a Chinese reopening is impossible to predict, when it does happen, it could go some way to plug the demand gap left by slowing growth across US and Europe.
Energy prices in Europe have fallen significantly
Though the warmth of summer may seem like a fleeting memory, forecasts suggest that Europe is instead on track to see a milder winter than initially expected. This will significantly affect energy usage and may minimise the sting of rising heating bills over the colder months. Dutch TTF gas prices (Europe’s main benchmark for natural gas) have already fallen 60% from the historic highs seen earlier this year following Russia’s invasion of Ukraine, and Goldman Sachs now predict that weaker usage could cause prices to fall by a further 30% in the coming months. In the UK, where the end of the government’s energy price cap in April has raised expectations of a boost in inflation, falling energy usage and weakening energy prices would be very welcome.
We do not pretend to be forecasters of key geopolitical events. However, it is worth emphasising the role of the ongoing war in Ukraine and how significantly this has marred sentiment across Europe. A much-desired end to the war could be the silver bullet required to bring down food and energy prices, subsequently reducing inflation and allowing central banks room to manoeuvre away from the more restrictive monetary paths.
There are many reasons to be cheerful and more optimistic as we leave behind an awful year, on so many fronts. Investment wise, many of the world’s top investment managers expect double digit gains in 2023. More about this next week in what will be my final musings for the year.
Wrap up warm and enjoy the football. Personally, I won’t be watching it live as I’m compering at a concert from 7pm on Saturday night. As somebody said to me, “a schoolboy error”!
Gary and the Blue Sky Investment team
Please Note: This communication should not be read as giving specific advice regarding your personal circumstances. This would only be given following detailed assessment of your individual needs. The value of investments may fall as well as rise; you may get back less than invested. Past performance is not necessarily a guide to future returns.