2022 was a very tough year for most investors ending with high inflation, higher interest rates and moving into a recessionary environment. Many were predicting that the global recession will continue into 2023.
The best recession indicator is the inverted yield curve with the US two-year Treasury note continuing to offer more (4.2%) compared to the US 10-year (3.6%). For clarity, the inverted yield curve has emerged roughly a year before all recessions since 1960. On top of the cost-of-living crisis the UK was also hit by numerous political crises which added to the turbulence for domestic investors. The biggest crisis, being when Liz Truss and her then Chancellor attempted to put through a growth stimulation package in September, announcing billions of pounds of unfunded tax cuts. This sparked the biggest sale of the pound and gilts in almost 35 years, forcing the Bank of England to intervene.
As we move into 2023, I’d argue now is not the time to run for cover. Yes things could become cheaper, but many asset classes have been hammered already, to the point where valuations are already looking attractive from a long-term investment perspective. I also feel inflation may now have peaked and will start to fall back in 2023, although it is unlikely to be near 2% in the UK any time soon.
Sectors that could prove fruitful are energy and utilities. As a result of further pushes into alternative approaches companies in this sector are going through a complete change. Healthcare and Financial also look good as sectors to have exposure to. There are also the traditional UK equity income funds, once the bedrock of many an investor’s portfolio.
Despite all the doom and gloom, there has been some positivity. With a quarter of Fund Managers predicting the prospect of an end of the war in Ukraine there is a cause for optimism. 19% remain positive about the opportunities in undervalued companies. This along with the recent announcement of China’s relaxation of its zero Covid policy, add to the potential stimulation of global growth.
However, 2023 will probably be a difficult year, and volatility will continue. My final message is not to let uncertainty give way to pure pessimism. Markets have already fallen significantly, but you only lose money if you sell and crystallise your assets. Long-term investors must see through these very trying times and recognise volatility is also an opportunity.
If you would like to discuss your current investments or future plans we would be happy to schedule a call – Contact details for the CFM team are here and my contact details are:
T: 0203 6970561.
Stephen Lovelock, January 2023