Please find below our Investment Market Update as at 6th January 2023.
Happy New year to you all. I hope you had a fantastic time over the festive period.
The first few days back in the office have seen investment markets move in a positive direction, in contrast to what we saw at the start of last year. Most of the bad news appears to be in the price, and as we expected, we are beginning to see inflation weakening, although central banks still appear committed to aggressive rate rises, for the time-being anyway.
Corporate earnings are deteriorating in some sectors, but this is not universal, and it will be interesting to see how earnings announcements unfold over this quarter and next.
Our in-house portfolios have circa 20% held in cash. We still believe it’s too early to commit this money, particularly across the more dynamic growth orientated portfolios.
Bond holdings have been included in the portfolios for the first time for some two years or so, following a brutal 2022. This has created more stability to the relevant portfolios. Our recent switch into ETF Sustainable European Financials in December has worked out well with an increase in value of over 4% since the switch for many clients. The renaming of our infrastructure portfolio to the Future World portfolio has widened the remit, and the inclusion of this Financial ETF at 15% of the total holdings has enhanced returns.
The sector with the weakest growth over the last month has been technology. Whilst the tech sector is dominated by the US, the experience of London’s top 10 listed tech firms gives you an idea of the extent to which sentiment has changed. These companies have lost a combined £20 billion in value since the beginning of 2022, according to an analysis by the Evening Standard.
On the flip side, we have increased our exposure to the Pacific region in recent switches and although prone to volatility, we are pleased with the outcome. The Hang Seng index in recent months had fallen to levels last seen in 1997!
What is the outlook for 2023?
Egg on their face
This is the time of year when many investment houses fall into the trap of making predictions, something we won’t do because notoriously, when one looks back in history, many are left with ‘egg on their face’.
Predictions may seem convincing but in an uncertain world they are largely worthless as there are so many variables. We can however look at trends and expectations.
A useful summary has been provided by LGT Wealth, one of our investment partners.
Over the course of 2022, we saw the investment landscape go from a low interest rate environment to one of rapidly rising interest rates for all the reasons that we have previously documented.
The Ukraine war exacerbated already fragile global supply chains, previously exposed by the US-China trade war and the pandemic. The manifestation is that countries have been forced to bring supply chains back closer to home.
In his 2022 annual shareholder letter, BlackRock’s CEO Larry Fink said, “the invasion of Ukraine has finally brought about the end for globalisation”. A change which will bring with it opportunities.
Adaptation to climate change
Across the world, business models and supply chains are being disrupted by climate change. From the inability to transport goods along rivers, to lack of water impacting industrial processes such as the production of semi-conductors, through to dramatic reduction in agricultural yield. Businesses that are not sufficiently insulating themselves against these risks will be the ones that will be left vulnerable and exposed.
We all know that interest rates have risen rapidly in the west and its even started to happen in Japan. On the other hand, China continues with their loose monetary stance. Once it is deemed that inflation is under control, interest rates hikes will slow and eventually, rates will begin to weaken. The question on everyone’s minds is when will this happen?
Survival of the fittest
Looking forward, LGT Wealth believe a focus on earnings resilience and rock-solid balance sheets is imperative. The end of ‘cheap money’ will likely result in the fittest companies surviving and thriving.
The hope remains that the US can avoid recession but even in this environment, corporate earnings could remain challenged. Hence why the quality bias taken by LGT Wealth should help protect portfolios.
What do other investment houses think?
As usual, there has been a great deal of posturing as to the outlook for 2023. This includes some of the key themes and sectors. Let me try and summarise the many opinions:
I will defer to a comprehensive assessment of views for Wall Street, compiled by Bloomberg Markets.
Fidelity International reckons a hard landing looks unavoidable. Barclays Capital Inc. says 2023 will go down as one of the worst in four decades for the world economy…dramatic headlines but no surprise.
The consensus view however is that a mild recession will hit both sides of the Atlantic with a high bar for any interest rate reduction, even if inflation has peaked…much is already in the price of assets.
As the article points out, many investment houses got it badly wrong in 2022 and were indeed, left with ‘egg on their faces’.
Goldman Sachs Group Inc., JPMorgan Chase & Co and UBS Asset Management see the economy defying the bearish consensus as price growth eases, signalling big gains for investors if they get the market right… something we expect.
Perhaps the easy money will be made in bonds at long last, according to the article. This follows a year which saw bonds posting the biggest loss in the modern era. Perhaps bonds will revert back to their traditional emphasis as safe havens.
Many investment houses expect a lot of volatility in the first half of 2023 with some significant opportunities opening up for the second half of the year.
There was a comment made about the crypto bubble bursting. Some investment houses, after showing a curious fascination for the ‘digital gold of tomorrow’, no longer appear in the mood to talk up the industry.
Covid is no longer seen as a material consideration for global strategists, except in China where their high-risk effort to rapidly reopen the economy, could have profound consequences for the world’s investment and consumption cycle, depending on whether they are successful.
The outlook from HSBC Asset Management
I received a short summary from HSBC which is worth sharing too, although the only thing we disagree with is the comment about real estate in this high interest environment.
- The outlook heading into 2023 remains uncertain and so we continue to advocate caution. There has been a material improvement in valuations and navigating the opportunities will require portfolio dynamism.
- Short-duration bonds become the natural asset allocation, with parts of the credit space offering good income opportunities. Price dispersion remains high and being active will be key to capitalise on market turning points. In emerging markets, attractive valuations, a weakening dollar and China policy support creates opportunities, but it is important to be selective.
- The hunt for new diversifiers has intensified. With this, truly uncorrelated asset classes are attractive. Defensive growth asset classes such as real estate or infrastructure remain beneficial as diversifiers and as income generators.
The latest news
- Rishi Sunak has said he will halve inflation this year. Currently 10.7%, the forecasts are that it will drop to 5.2% by the end of this year anyway. So, if he does nothing his target will likely be achieved. Of course, that does not mean prices will fall, just rise less quickly.
- However, the annual growth of UK food prices was 13.3% in December, the highest reading on record, according to new figures from the British Retail Consortium.
- The Federal Reserve warns of further rate rises, suggesting that investors should not underestimate their desire to keep rates tight for some time. “An unwarranted easing in financial conditions would complicate efforts to curb inflation”, was a statement in the minutes of last month’s rate setting committee.
- Bloomberg reports that Amazon is laying off more than 18,000 employees, a significantly bigger number than previously planned, in the latest sign that a tech slump is deepening. The share price gained by 1.7% post market. Another example of where bad news on the face of it, is good news, due to the improved prospects for profitability.
So, let’s finish with some pointless predictions
Equity investors hoping for a new year reprieve will probably be disappointed, according to one of Wall Street’s top bears.
Piper Sandler’s Michael Kantrowitz, predicts the S&P 500 will fall 16% to 3,225 this year, the lowest target among forecasters that have been tracked by Bloomberg. It would be the first time since 2002 – and only the fifth time in almost a century that the index suffers at least two consecutive years of double-digit declines. Of course, the most sensational forecast grabs the headlines!
On the other hand, attracting the headlines is Wharton Professor, Jeremy Siegel, who believes the stock market is poised to surge 20% in 2023. Driven by expectations that the Fed will acknowledge that inflation is falling.
So, who will end up with egg on their face?
The reality is likely to be somewhere within these wide parameters but to our mind it’s folly to provide specific forecasts.
Furthermore, the S&P 500 is only part of the investment landscape.
Whilst we may have to wait a while for a catalyst to drive equity returns across growth orientated assets, this doesn’t mean that there aren’t opportunities presenting themselves as the market cycle develops. Our successful move into financials, the Pacific region and of late Bonds, is proof that there are attractive opportunities unfolding.
We may well see a ‘pull-back’ in equity prices over the next couple of months on deteriorating earnings data (profitability) but don’t also underestimate that markets could surprise on the upside. A lot of fear is baked into prices and if the expected deterioration doesn’t materialise, then this could be good news.
Economically, the global outlook is quite bleak but as companies make redundancies and cut costs, share prices may rise.
The main game in town concerns interest rates. Analysts will be watching data like a hawk and strategists will be hanging on every word uttered by central banks, all looking for signs that we may enter a new phase of monetary policy.
We continue to be vigilant and nimble with our approach.
Have a great 2023 and on many fronts, let’s hope it is better than 2022.
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.