New year, new opportunity
After a year when investors appeared to look at life with a half-empty view, the start of 2023 appears to be quite different. Taking their cue from the evident peak of inflation, investors are discounting a peak in interest rates in 2023. At the same time, investors are ignoring the risk of a recession and the current downgrades to earnings.
There is good news to fuel the fire though. Whilst the health impact of China’s reopening is likely to be tragic, the Chinese authorities are also supporting the economy via policy changes. This is likely to support a global economy which was struggling to generate positive momentum.
Closer to home, the threat of a widespread European recession due to high energy prices appears to be reduced as the Continent is enjoying a mild winter and has increased non-Russian gas supplies meaning that energy prices are lower.
With the recent rally there are signs that investor complacency has returned. The VIX index provides a guide to the expected volatility (or risk) priced into the US equity market. When it is elevated, as it tends to be during sell-offs, then it suggests that risk aversion is high. Over recent weeks, with the rally in the equity market, the VIX index has fallen below 20. In our view this suggests that equity investors are complacent about downside risk in coming months.
The equity market has moved in the opposite direction to the VIX, and with the VIX back below 20, it suggests that investors have become complacent through November and into 2023.
Source: Bloomberg, Artorius
The contrasting views of the bond market, believing that the Federal Reserve will move to cut interest rates in 2023, and the equity market, in thinking that there will be no earnings impact from the economic slowdown, is a high wire balancing act.
The course of markets in 2023 is likely to be determined by the path of interest rates and earnings.
All expressions of opinion reflect the judgment of Artorius at 20th January 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.