Perhaps not surprisingly, following a difficult year in 2022, investment markets turned optimistic in January. In fact, the change in mood over the month was very pronounced and led to positive returns for both equities and bonds.
Reflections from Davos
As business leaders and top government officials from around the world met in Davos, Switzerland, optimism spread that 2023 might not be as bad as originally feared.
IMF Publishes Improved Growth Projections
Throughout 2022 we saw constant and substantive downward revisions to economic growth forecasts. It is therefore notable that the IMF’s latest set of forecasts published at the end of January showed an improvement in growth (versus the previous forecast). However, the expected slow-down remains pronounced.
Source: IMF January 2023 Forecast. Real GDP.
Inflation Falling?
Mood music around also inflation improved as people observed increasing evidence that headline inflation is falling. However, core inflation remains stubbornly high.
Interest Rates Rising
In response the main Central Banks all increased interest rates again in the first couple of days of February.
- ECB – increased by 0.5% to 3% and signalled intention to increase by a further 0.5% at its next meeting in March.
- Fed – increased by 0.25% to 4.75% (slowing the rate at which it has been increasing)
- Bank of England – increased by 0.5% to 4%.
Decision Gridlock for the US
It took 15 rounds of voting for the Republicans to elect Kevin McCarthy as the speaker of the House of Representatives. How likely is it that the new House speaker will have the ability to do deals with the Democrats, even if he wants to? A major issue that needs agreement before the summer is to increase in the US legal debt ceiling. Lack of agreement could result in the US defaulting on its debt, something that is unthinkable for most and not something the markets would like. History tells us that every time this has happened in the past, agreement has been reached. However, the difficulty agreeing the House Speaker means there is likely to be even more brinkmanship this time and hence, an increased risk of this being disruptive for markets.
Our Investment Outlook
While the first few weeks of 2023 brought some more optimism amongst forecasters, we maintain the view that 2023 will likely be a tricky year.
- Headline inflation will fall during 2023. However, core inflation will likely prove sticky and remain well above central bank targets.
- As a result, central banks will continue to raise interest rates even in the face of slowing economies.
- Economies will slow further this year although the slowdown might be less than expected at the start of the year.
- However, we note that there are mixed signals. For example, labour markets remain tight complicating the lives of policy makers who need a softer labour market in order to control inflation.
- Slowing economies and high inflation, at some point, translate into reduced earnings for companies. So, we expect pressure on company earnings to show up in the first half of this year.
- The change in Central Banks policy stance from quantitative easing (QE) to Quantitative Tightening (QT) reduces market liquidity and increases the risk of market fractures.
- After abandoning their zero-Covid strategy we should see significant improvement in China’s economic numbers later in the year. A key question for this year is how China’s reopening will impact global growth and energy prices.
- Ukraine and other geopolitical risks remain significant with bad outcomes not currently priced into markets. The core assumption of markets at the moment is that the Ukraine war will not end any time soon.
- Overall, markets are likely to remain volatile until there is more certainty around (a) core inflation falling back to the target of 2% and (b) the depth and length of economic slowdowns / recessions.
For short-term investors, this is not a market to be in but for our clients who are long-term investors, we continue to advise them to follow their plan and use market weakness to build on positions.
And finally, Predictions for 2023
An interesting chart I came across which summarises what a wide range of experts are expecting for this year.
Source: Visual Capitalist Prediction Consensus: What the Experts See Coming in 2023 (visualcapitalist.com)
John Tuohy is Chief Executive of Acuvest, an Irish-owned, independent advisory firm specialising in wealth management, pensions, and investment advisory services for individuals, companies, pension schemes, charities, and institutions. John is a Chartered Financial Analyst (CFA) and a Fellow of the Chartered Association of Certified Accountants.
