Articles

Few investors will mourn the passing of 2022 into the history books.  The year has been characterised by persistent inflation and tighter monetary policy, a reversal in trend from what we had become used to over the last decade and more.  Although many of these challenges will linger into the early months of 2023, we do believe that opportunities for investors, across both credit and equity, are improving.

The main driver of financial markets next year will again be inflation and the key question that investors continue to ask themselves is whether or not inflation will start to come down as economic activity slows.  If so, then central banks will stop raising rates, and recessions, where they occur, will likely be modest.  There are signs that inflationary pressures are moderating already and will continue to do so in 2023.  We therefore feel that both inflation and interest rates will peak in H1 2023.

China will remain a key component when considering the direction for financial markets in 2023.  The prolonged period of lockdown in China appears untenable now and we expect the country to experience an acceleration in activities as pent up demand is released.  While the timing of policy changes remains uncertain, the market’s recent performance has highlighted how sensitive investors are to any signs of a shift in approach.  Furthermore, and perhaps more importantly, normalisation of the Chinese economy could significantly ease the supply chain issues that have contributed to rapidly rising inflation in the developed world.  This may well be a key driver for lower inflation in 2023.

Although GDP growth is likely to be lacklustre in 2023, both stocks and bonds have pre-empted these macro troubles and look increasingly attractive from a valuation perspective, especially when compared to the past decade.  The broad based selloff in equity markets has left some stocks with strong earnings potential obtaining very low valuations.  We continue to adopt a cautious approach albeit focussed on equities, many of which have already priced in a lot of bad news and are offering dependable dividends.  Despite the drawdown in 2022 we believe that portfolios are well positioned to fully participate in the recovery as and when it comes.