This note contains a section on recent developments, our views, what we are watching, and our portfolio strategy.
Comments on recent performance are not indicative of future performance.
Markets at a glance
- All eyes are on the US inflation data release this week, which is expected to have continued to slow down compared to January 2022 (headline and core). However, it remains to be seen if the recent disinflationary comment from Fed Chairman Jerome Powell holds true.
- This matters for markets. Both equities and bonds rallied following those comments at the recent 25 bps rate hike announcement, but the recent blockbuster jobs report and services activity data quickly cooled the optimism. Government bonds and equities fell, and the US dollar rose across the board last week and any disappointment in the inflation data this week could weigh on investor sentiment.
- In addition to inflation data, US activity data (such as retail sales and industrial production) are also out this week, which is likely to have benefitted from the mild weather in January, putting this disinflation story at risk.
- For now, the most obvious consequence of a more hawkish tone from the Fed and strong data has been a deeper yield curve inversion. A yield curve inversion is usually bad omen for the US economy, but we believe that any recession in the US will be shallow given the lack of imbalances that characterized previous recessions.
- On the other side of the Atlantic, UK Inflation is also due this week. Although it’s expected to slow, consensus predicts a double-digit print. This could lead to a policy dilemma for the Bank of England as the British economy flirts with a recession (growth was flat in the last quarter of 2022).
- In Europe, there are no major economic data releases so markets will likely take cues from global developments this week. Over the medium term, Europe, as well as the broader global economy, should find some support from China’s reopening as Beijing continues to support growth (evidenced by strong liquidity and credit data last week).
- Overall, we continue to believe that bond yields have peaked as central banks reduce the pace of increase in interest rates and should stop raising them in the first half of 2023.
- On the equities side, we’re about halfway through the earnings season and the big takeaway so far is that fewer companies are beating estimates on average compared with the past 10 years. Some sectors are surprising to the upside, such as Healthcare and IT, which has been positive for portfolios given our sector allocation (more on that below).
Portfolios at a glance
- 2023 is off to a strong start, benefitting from low- to mid-single digit returns from fixed income assets and high single to double digit returns from equities.
- We are still invested globally, with a bias towards quality investments with strong balance sheets, high returns on invested capital and that are leaders in terms of environmental, social and governance practices. The bulk of these investments have been rewarded this year with solid positive returns in excess of the market.
- Why? In a nutshell, as opposed to 2022, sectors like utilities and energy, which we are less exposed to, have underperformed this year, while a number of companies within technology and healthcare, which we are more exposed to, have performed strongly.
- Six weeks do not make a trend but nevertheless the recent positive performance patch shows a continuation of the stabilisation of our performance seen for several months from an absolute sense and relative to benchmarks and peers.
- We continue to remain true to the key pillars of our approach as mentioned above, while continually seeking assets and investments that may improve outcomes both in the near term and in the long run.
Past performance is not a reliable indicator of future returns.
Market Performance
Data as of 10/02/2023. Source: Bloomberg. Note: The Yield and P/E figures for stock markets respectively use 12m forward dividends and earnings divided by the index’s last price. For bond markets, the yield to maturity is used.
Past performance is not a reliable indicator of future returns.
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Investment Risk
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Information correct
as at 13 February 2023.
Past performance is not a reliable indicator of future returns.
© Brown Shipley 2023 reproduction strictly prohibited.
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