1st April 2023
Global inflation proves to be stickier still, with US inflation remaining stagnant and UK inflation jumping markedly higher against all expectations, remaining firmly in double digits. This will continue to put pressure on global central banks who are stuck between a rock and a hard place with inflation and economic growth. In the US, the economy has remained buoyant and stronger than feared. Similarly in the UK, economic activity has not yet begun to weaken significantly, but the Bank of England is acutely aware that there is fragility in the system and that monetary policy lag means the true effects of higher rates will take time to seep into the economy.
Cracks are already beginning to appear. The recent failure of Silicon Valley Bank in the US demonstrating that such a rapid rise in interest rates can cause pressure on the banking industry, with more than one bank having failed now during this rate hike cycle, and Credit Suisse finally ending years of underperformance and merging with its Swiss rival, UBS. Smaller banks in the US (those with assets under $250 billion) are not subject to the same capital requirements as their larger counterpart or indeed those in Europe.
Vladimir Putin has visited an annexed part of Ukraine in a show of force, and met with Chinese President Xi Jinping. The Russia-Ukraine war continues on, though this has largely been discounted by markets now and will remain so until and if there is a resolution. Downside risk remains if there is any escalation.
2023 has continued the recovery in risk assets following what appears to be thepeak of inflationary pressure in the US and Europe, having come under pressure last year from higher inflation rates and recession fears whilst central banks began hiking interest rates. Value equities continue to offer more protection against downside threats compared with their growth peers, as they tend to benefit most from strong recoveries after recession and trade on lower earnings multiples. We are taking a more cautious approach to portfolio positioning for a possible recession. We still like selective growth stocks where there remains true innovation and potential for change, especially recent trends in consumer behaviour that were accelerated by the pandemic but prefer value equities on the whole. We also continue to hold our overall equity weighting at neutral. Fixed income has started looking more attractive following last year’s bear market, with yields now at levels not seen in well overa decade. Bonds also remain an important diversifier in our portfolios. With inflation having seemingly peaked, we believe interest rates could begin to head lower as fears of a global recession pick up. Low duration bonds look the more appealing investment still given the level of inversion in the yield curve, along with selective investment grade credit which was hit hard during 2022. Duration will become appealing again as market participants shift their primary concern away from inflation and towards growth fears, however we are cautious in our positioning here. We also hold an allocation to cash to offsetsome of this fixed income risk and dampen portfolio volatility. We have also been adding ‘alternative’ assets to the portfolios, which offer low-to-negative correlations to traditional asset classes (stocks and bonds) and give the potentialto protect during times of significant market volatility, such as we are seeing at present.
The UK market is very value-tilted and despite this year’s positive relative performance is still highly attractive on a valuation-basis. The UK economy has also recovered well from the pandemic, though economic growth is faltering. The main driver of UK equity outperformance will be relative valuations.
There is good value to be found in European equities, however with war on thecontinent and the ECB lagging significantly in its inflation outlook and response, there are many headwinds on the horizon for the European economy. Despite this, equities in the region are attractive given historic valuation differentials to the US, and financial companies stand to benefit with interest rates on the rise.
The US represents poorer value relative to the rest of the world due to the highproportion of tech companies that still command a multiple far in excess of the broader market, however it also has the best long-term earnings growth and some of the most outstanding quality companies, as well as the most innovative. In times of global stress, the US also tends to act as a safe haven investment, which props up markets. Overall, we are cautious on the US and soare positioned underweight in portfolios. We do believe the US will remain an attractive investment option in the long-term, but with some obvious headwinds making us more cautious for now.
We believe Japan to be an extremely poor environment for equity performance. The Japanese economy is predicted to grow at the slowest pace of all regions, in addition with a declining and ageing population, the prospect of future economic expansion looks unlikely. Thus, we expect poor relative equity performance from Japan. In the short-term, attractive valuations in the region may boost markets, but this will likely be short-lived.
Asia Pacific & Emerging Markets
Asia Pacific and Emerging Markets are predicted to see exceptionally strong GDP growth over the several years and with China’s reopening look set to outperform the broader global equity market. Thus, we are comfortable maintaining an overweight position. The more recent remarks from the Chinese government have been positive but must be taken with a pinch of salt. We currently like frontier markets as a more attractive investment option within the emerging markets universe. Typically, market move in cycles and EM vs US performance is no different. We have been in an extended period of US equity outperformance, and we now expect this trend to change in favour of EM stocks.
The opinions expressed in this update are those of A&J Wealth Management Limited only, as at 1st April 2023, and are subject to change.
The content of this publication is for information purposes and should not be treated as a forecast, research, or advice to buy or sell any particular investment or to adopt any investment strategy. It does not provide personal advice based on an assessment of your own circumstances. Any views expressed are based on information received from a variety of sources which we believe to be reliable but are not guaranteed as to accuracy or completeness. Any expressions of opinion are subject to change without notice.
Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.