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
- Given the European Central Bank’s (ECB) hawkish tone in recent weeks, all eyes will be on the euro area preliminary inflation print for February in the hope that it shows signs of easing price pressures. Regardless of the outcome, we expect the ECB to deliver another 50 bps increase in March as underlying inflation remains far above the 2% target. On the other side of the Atlantic, the minutes of the Fed’s February meeting confirmed that US policymakers are not ready to relent in their fight against inflation either.
- Despite the optimism in recent weeks, markets seem to have now largely accepted that the possibility of sizeable rate cuts from the Fed in 2023 is unlikely. This was driven somewhat by the better-than-expected flash PMI (Purchasing Managers Index) surveys for February last which markets reacted strongly to (bond yields jumped and equities sold off). The surveys showed the US Composite PMI has now crossed the 50-threshold to move into expansion after 8 months in contraction.
- We’ll be keeping a close eye on this week’s Chinese PMI data for confirmation that the economic recovery is gathering steam – one of the key views in our 2023 Outlook. High-frequency mobility data suggests that life is gradually returning to normal in Chinese cities, and we expect China to provide a significant impulse to global growth in the coming months.
- With China expected to buck the weak growth trend, things aren’t looking as promising for the German economy, which shrank more than initially estimated in the fourth quarter of 2022. Germany is now facing the possibility of a recession, though activity data from the first two months of the year give hope that any contraction may be shallow. It’s a similar story in the UK. While it technically avoided recession with 0% growth in the final quarter of 2022, it’s not out of the woods yet and is still at risk of dipping into recession this year.
Portfolios at a glance
- We are reaching the end of our series of 2023 Market Outlook events with clients and would like to share a short recap for those who were unable to attend.
- When we presented at these events, we typically used the phrase “Our outlook for 2023 and beyond”. This is important because the bulk of portfolios (>70%) remain positioned for the long-term in line with our strategic asset allocation.
- The news headlines (including ours) are dominated by inflation, recession fears, tech company lay-offs and so on. But the way that we are positioned means that the near-term outlook should typically affect no more than 20-30% of a portfolio. This is where tactical asset allocation comes into play, allowing us to deviate slightly from our long-term strategic asset allocation to capture shorter-term trends in the market.
- Our 2023 views are centered around 3 keys pillars: Peaks (in inflation), Pivots (in central bank policies), and a Pickup (of Chinese growth). These views have not changed and are bolstered by what happened in the first two months of the year. However, we continue to keep a close eye on the inverted yield curve and developments in credit markets.
- In turn, we are still fully invested and broadly in line with our updated strategic asset allocation – why?
- Given the rise in interest rates, fixed income - especially government bonds - has a bigger role to play in providing returns as well as a diversifier in portfolios.
- On the equity side, our exposure is close to normal long-term levels for each risk profile as they should benefit from the long-term forces at play. For instance, investing in the technological advancements that underpin the change in our economies (both today and for decades to come) across many industries ranging from energy to transportation, manufacturing, healthcare and more.
Market Performance
Data as of 24/02/2023. 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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Information correct
as at 27 February 2023.
Past performance is not a reliable indicator of future returns.
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