1st March 2023
Global Outlook
Global inflation has proved stickier than hoped after the latest figures from the UK and US confirmed the rate of decline in inflation had slowed significantly. Bond markets are now pricing the likelihood of the Federal Reserve raising interest rates to around 7% before they pause or begin cutting. Interest rates at such level would have very significant economic effects.
US-China relations have been tested after a Chinese spy balloon was shot downover US territory by a US Air Force F22-Raptor fighter jet. Several more of the balloons were spotted and subsequently shot down. China has denied the nature of these balloons and called the US response an overreaction. Further pressuring the relationship is the prospect that China may soon begin to arm Russia in its front against Ukraine, something the US and its allies have repeatedly warned China against, citing severe consequences. It remains to be seen how this will progress but the risks are as yet not being fully appreciated by markets.
China’s economy is showing further signs of strength, with manufacturing PMIs no highest in well over a year and expanding further. A rebound in economic activity was of course expected following such harsh lockdown measures and economic restrictions, but the extend of the rebound and resultant impact on the Asia and EM region has been extremely pleasing to see. On the other hand, what could be of some concern is that such a demand boost will ultimately put upward pressure on commodity prices and as such, inflation.
A&J Outlook
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.
UK
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.
Europe
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.
United States
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.
Japan
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.
Disclaimer:
The opinions expressed in this update are those of A&J Wealth Management Limited only, as at 1st March 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.
