Investment Comment
14th April 2023
Holding pattern
Even though the weather is getting warmer, and the county cricket season has started, economic data appears to be lacklustre. Investors await the quarter one earnings updates from US companies, which may provide more colour on the outlook of corporate health given the economic and interest rate backdrop. China reopening may be reflected as a positive, as may the better-than-expected European economy set against the slowing US economy. The developed economies of US and Europe both continue to face into the headwinds of rising wages and higher interest rates.
In the US, recent economic survey data of late has been poor, with the initial signs emerging from the impact on lending after the collapse of US banks (Silicon Valley and Signature). The National Federation of Independent Businesses (NFIB), which represents smaller companies, released their most recent survey this week and it showed a significant decline in credit availability.
Stepping back from the economic policy challenges for Central Banks for a moment and looking at the investment implications of the economic cycle, it maybe the case that the revenue and profit boost from inflation will fade in coming months. Inflation is good for profits and revenues, for those companies which can raise their prices faster than the costs. If inflation slows, which it is likely to do, then the upward boost from inflation fades. If at the same time wage growth continues, then corporate profit margins are likely to come under pressure in the coming months.
NFIB survey reflects that credit conditions for smaller US companies have become significantly weaker in recent months
Source: Artorius, Bloomberg
Wages are starting to rise more quickly than prices for companies which historically has led to lower profit margins
Source: Artorius, Bloomberg
Whilst 2022 saw a difficult backdrop for investors as interest rates increased, the downward risk in 2023 may come via the corporate fundamentals being weaker than expected. In time, as these challenges are faced and overcome, potentially at lower valuations, we will set about taking opportunities to add risk, but for the time being we will remain cautious.
Gerard Lane
Chief Investment Officer
All expressions of opinion reflect the judgment of Artorius at 14th April 2023 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions. Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.
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