31 Jan 2023
With 2023 in full swing already, Chief Investment Officer, Chris Lioutas, looks back on how we left 2022 and gives his analysis of what we can expect in 2023.
The December quarter saw a strong period for markets locally and globally, providing a positive end to a very tough calendar year where almost nothing worked outside of cash and private assets (which have yet to be revalued).
The positive quarter in markets was driven by improvements (or no worsening) of risks surrounding central bank policy tightening, inflation, and China lockdowns, with investors comfortable enough to dip their toes back in the water with plenty of assets showing valuation appeal.
Whilst central banks continued tightening policy in the quarter by raising rates and shrinking their balance sheets, many did slow the pace of tightening in addition to comments that seemed to indicate that they had done most of the heavy lifting.
That was somewhat confirmed by inflation data in the US abating whilst leading economic indicators continued to weaken, resulting in rising recessionary concerns for 2023. Housing markets locally and globally capitulated, with data worsening, whilst consumption and labour markets remained way too strong for any sort of central bank pivot.
President Xi of China was re-appointed, now as their “leader for life”, delivering a speech that the West interpreted as being hostile to non-China interests. Not long after, China swiftly moved to a covid reopening plan with restrictions easing over the quarter, giving investors comfort this reopening would be sustained. This put a rocket under Chinese assets, and Asian and emerging market assets more broadly, which had been under significant pressure for the better part two years as China lockdowns persisted.
There was no major new or positive news out of Russia and Ukraine with fighting continuing. Further agreements were made to let more agricultural products out through the Black Sea thus assisting global supply constraints whilst the European proposed price caps on Russian oil were adopted by the G7 countries.
Lastly, new leaders came to power in the UK and Brazil, with the UK debacle one for the history books whilst Brazil moved back to the Left. In the US, the Republicans won the balance of power in the House, largely as expected, giving President Biden a much harder path from which to lead.
Given the above, we expect economic data to continue to worsen in Q1 as central banks remain committed to bringing inflation under control. Corporate earnings season will be watched as closely as ever for any signs that earnings may need to be revised lower yet again. We think inflationary pressures will continue to abate but not at a fast enough pace to stop central banks from tightening policy again. We, like others, will be watching consumption and labour market data very closely for any signs of weakness given both remain unusually strong. This all makes for a likely continuation in heightened market volatility during a period where we should start getting answers, or a clearer picture of what lies ahead.
If you have any questions or your personal circumstances have changed please do not hesitate to contact your financial adviser.
General Advice Warning - Any advice included in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, you should consider whether it’s appropriate to you, in light of your objectives, financial situation or needs.
