Investment Comment
2nd December 2022
Festive cheer?
As we head into the Christmas season, markets have been buoyed with festive cheer. Where previously central bankers were channelling their inner scrooge, now as they reflect on “Christmas future” they have eased their stance. While not giving gifts they are at least signalling a slowing in the pace of interest rate rises, much to the benefit of markets with both equities and bonds rallying, while the mighty US Dollar has fallen back easing pressure elsewhere.
Global equities have risen nearly 15% since the end of September, albeit with dollar weakness this equates to “only” 7% for a Sterling investor. Earlier in the year GBP returns were protected somewhat by the strength of the US Dollar relative to the pound and this has to some extent reversed. Within our portfolios we have hedged part of our USD exposure to protect against this rebound, albeit we believe that the challenges faced by the UK economy means that we don’t expect to see a prolonged period of GBP strength.
Equities and bonds have rallied through the 4th quarter, while US Dollar has fallen back
Source: Bloomberg
It feels like we talk a lot about central banks and particularly the US Federal Reserve (“Fed”) but this year markets have been dominated by their actions and most significant market moves have been triggered by the perception of how restrictive monetary policy will be. Right now, the market is focused on a “dovish” (less restrictive) outlook and this week Fed Chair Jerome Powell in a speech delivered on some of the more dovish messages that markets were hoping for.
There were two highlights, confirmation that the Fed was likely to reduce the size of incremental interest rate hikes and a caution around the economic impact of monetary tightening. Powell endorsed market expectations of a 50bp interest rate hike in December, a slower pace than previous months, saying that ‘“the time for moderating the pace of rate increases may come as soon as the December meeting.’ Powell also stated that ‘my colleagues and I do not want to overtighten’, and while this might not seem like much it is a welcome sign that the Fed is conscious of the risks of overtightening policy given the lag it takes for hikes to feed through to the real economy, and not solely fixated on inflation.
On the inflation front, Eurozone inflation came in lower than expected and there are increasing signs that inflationary pressures are easing, albeit still at high (and for many painful) levels. The backdrop appears to be improving for global supply chains and weaker consumer confidence points to lessening demand, which supports a falling inflation narrative.
Despite the recent rally we remain cautious on the outlook. Recessionary risks are rising, and this will likely impact corporate profitability particularly as we expect margins to fall. This will put pressure on earnings growth through 2023 and is likely to act as a headwind despite cheaper valuations. However, to reiterate the point we made in our recent Investment Outlook, while the immediate outlook is challenging, the longer-term backdrop for investors has actually improved as lower valuations tend to result in improved medium-term (5-10 years) investment outcomes.
Gareth Thomas Head of Investment Management
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FP20221202001 EXP 28/02/2023