At the end of 2022, it was tough to find an optimistic economist regarding the outlook for 2023. So far, in 2023, the markets, except for India, have looked through all the pessimistic forecasts. In fact, miraculously, they have had one of their strongest starts to a year for decades.
Furthermore, we have reverted to tech outperforming growth and both outperforming value by a considerable margin.
With reasonable justification, many commentators and managers alike were predicting bonds would outperform equities in 2023. It is still very early in the year, but so far, equities have not received that memo. At the time of writing (15th February), global equities are up circa 7% in contrast with fixed income, which is up in the region of 2%.
Asset Class Performance to 14/02/2023*
Given the economic data output so far in 2023, it’s somewhat puzzling to see how many equity markets have performed. Inflation, whilst potentially having peaked, remains stubbornly high. Central banks, especially the Fed and ECB, have been at pains to reiterate their determination to quash inflation and keep raising interest rates, leaving them higher for longer.
In simple terms, the question is this: how come the assets that did so well in the ‘lower for longer’ era are now surging in the ‘higher for longer’ era?
There appears to be only one plausible answer: the equity markets don’t believe the economy is as strong as some data suggests, and the central banks will therefore pivot quicker than some in the markets believe likely.
It remains our opinion that inflation will stay elevated, and way above the central bank’s 2% target, therefore, the pivot is wishful thinking rather than a likely outcome based on the available evidence.
We take the super positive current market movements, especially those in non-profitable tech, to be the result of highly speculative trading practices as opposed to people investing with a longer-term horizon. Recent market moves look to us to be a classic bear market rally. These usually carry with them a feel-good factor which is nice while it lasts, but eventually, a somewhat more sober reality will set in.
All that being said, we are not unduly pessimistic about risk assets overall. We still favour emerging markets, Asia and UK assets, and more value-oriented US stocks. Infrastructure continues to offer growth opportunities and diversification benefits, and we remain bullish longer term on the outlook for energy (of all forms) and commodities more broadly. There are still considerable opportunities within fixed income, particularly in the corporate bond space. Unlike some geographical areas within equities, bonds undoubtedly capitulated in 2022 and have attractive starting valuation levels.
*Information displayed is short term in nature to demonstrate performance over a specific time period. Please contact IBOSS for long term data, including since launch and/or 5 years.
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IAM 77.2.23
