Author: admin@hottinger.co.uk

by Haith Nori

March has seen a continuation of heightened volatility across global markets. Central banks across the developed world are considering more aggressive tactics for increasing interest rates as they are not yet achieving the desired result of reducing inflation quickly enough. Some find themselves re-assessing their originally estimated limits. The collapse of Silicon Valley Bank has created great uncertainty and fear within global markets as no one will want the history of the 2008 financial crisis to repeat itself. Governments acted quickly to prevent a financial crash. The Swiss National Bank stepped in to bail out Credit Suisse with a lifeline of $54 billion. Furthermore, UBS went on to merge with Credit Suisse.

At the beginning of March, at the Congressional Testimony, a hearing of the US Senate Banking Committee and House of Financial Services Committee, Jerome Powell suggested the possibility that interest rate hikes still have a long way to go, signalling that further, larger rate hikes may be needed. Markets reacted negatively to the announcement, sending equity markets lower. After an initial increase in bond yields, over the course of March these fell significantly.

On Friday 10^th March, Silicon Valley Bank (SVB), the 16^th largest bank in the US, collapsed, delivering the largest commercial bank failure since the 2008 financial crash. The bank was based in the Santa Clara region and at the end of 2022 had around $209 billion in assets. The main contribution to the collapse appears to have been a failure of management to properly manage the numerous risks that arise on bank balance sheets during periods of rapidly rising interest rates. The issue was further compounded by SVB’s concentrated exposure to the start-up and venture capital space, an area which has recent faced its own challenges which drove many of these companies to draw down on their deposit balances. The bank was heavily invested in long-dated Treasury Bonds whose value, as the Federal Reserve raised rates, markedly decreased. Silicon Valley Bank’s failure is the largest since Washington Mutual went bust in 2008, a hallmark that triggered a financial crisis that hobbled the economy for years’[i] leaving an uncertain atmosphere for many investors. Global markets in both equity and fixed income have reacted negatively to the news with Joe Biden promising to seek stronger regulations for banks in an attempt to reassure the public on the state of the economy. Nearing the end of the month, on 27^th March, First Citizens bank ‘bought about $72bn of the assets of the failed bank at a discount of $16.5bn’[ii] leaving c.$90bn of securities and other assets with the Federal Deposit Insurance Corporation (FDIC). First Citizens are taking over the running of 17 Silicon Valley Bank branches and also acquiring all $119bn in deposits and loans, which were set up post the collapse of Silicon Valley Bank. Finally, the FDIC have stated the collapse may well lead to $20bn of losses for its deposit insurance fund, which is paid for by banks themselves through sector-wide levies.

On 14^th March, US CPI data was released for the 12 months ending in February of 6.0%, down from January 6.4%, December of 6.5%, 7.3% in November, continuing its gradual decline since June (9.1%)! This is a more promising decrease since January showing progression has picked up again. On 22^nd March, the US Federal Reserve made the decision to raise interest rates by 0.25% to a range of 4.75% to 5%, taking interest rates to their highest level since 2007 and marking the ninth consecutive month of interest rate hikes in the US. This is despite the situation of the Silicon Bank Valley collapse where analysts predicted a potential halt in altering interest rates. In the UK CPI data released was 10.4% for the 12 months ending in February, a slight increase from 10.1% in January. This is slightly disappointing as the figures had been showing a decline each month for the past several months: 11.1% in October, 10.7% in November and 10.5% in December. On 23^rd March, in the UK the Bank of England announced another 0.25% increase in interest rates to 4.25% from 4%. Also, on 16^th March the European Central Bank (ECB) announced a 0.5% increase in their interest rates to 3.0% as they had originally signalled.

On Wednesday 15^th April, Jeremy Hunt the UK Chancellor announced the 2023 UK Budget making various changes. Notably, the UK Pension allowance has increased from £40,000 to £60,000 per annum effective from April 2023. Energy price support will continue at the current rate for the next three months to June 2023, limiting typical household bills to £2,500 per annum and corporation tax will increase from 19% to 25% from April.

On 16^th April, the Swiss National Bank swooped in to provide a $54 billion bailout to Credit Suisse in order to ‘shore up liquidity and investor confidence, after a slump in its shares had intensified fears about a global banking crisis’[iii]. A few days later UBS came to Credit Suisse’s further aid as the bailout from the Swiss National Bank was not enough, and ‘UBS will pay $3.2 billion for 167-year old Credit Suisse and assume at least $5.4 billion in losses from unwinding its portfolio of derivatives and other risky assets’[iv]. This leaves the Swiss Nation with only one universal bank; UBS Group AG.

In other assets, there has also been increased volatility. During March Gold reached its highest level for several months, Brent Crude dropped sharply at the beginning of the month to c.$73 and has since recovered slightly to end the month c.$79.77. The Dollar, after initially showing signs of strength, has decreased in value against the UK Pound, the Euro and the Yen. Both US 10 year Treasury notes and UK 10 year Gilts followed the same pattern of starting the month at strong levels reducing in yield to then slightly recover at the end of the month but still c.0.5%/0.4% lower in yield.

Overall, March continued the volatility witnessed in February across asset classes. The news of the Silicon Valley Bank collapse shocked global markets yet most Central Banks continued with planned interest rate hikes. Both Silicon Valley Bank and Credit Suisse have been bailed out. Brent Crude dropped sharply below $75 per barrel having started the month at c. $84 per barrel but recovered some of its losses by the end of March. Since the start of March, 10 year bond yields have generally fallen.

[i] https://www.reuters.com/business/finance/global-markets-banks-wrapup-1-2023-03-10/

[ii] https://www.theguardian.com/business/2023/mar/27/silicon-valley-bank-bought-by-first-citizens

[iii] https://www.reuters.com/business/finance/credit-suisse-borrow-up-54-bln-it-seeks-calm-investor-fears-2023-03-16/

[iv] https://www.reuters.com/business/finance/ubs-swallows-doomed-credit-suisse-casting-shadow-over-switzerland-2023-03-20/

by Haith Nori

February saw a continuation of increases in equity markets in Europe after a positive start in January, while US markets have moved in the opposite direction. At the beginning of February many central banks including the Federal Reserve, the Bank of England and the European Central Bank all increased interest rates once more. After an initial drop in yields, US and UK 10 year bond yields at the beginning of February have recovered to levels higher than seen in January as many other 10 year bond yields have reached highs not seen in years. The US Dollar has once again strengthened as the price of gold has fallen. Global tensions continue to rise as Russia’s invasion of Ukraine reached its one year anniversary (24^th February). Rishi Sunak is also attempting to push forward Brexit negotiations, having delivered the ‘Windsor Framework for Northern Ireland and Great Britain’.

On 1^st February, the US Federal Reserve made the decision to raise interest rates by 0.25% to 4.75%, marking a notable reduction in pace from their previous increase of 0.5%. Markets responded positively to the news, with the Technology sector in particular outperforming others, however February saw a more general decline alongside US Equity indices. On 14^th February we received a Valentine’s gift. US CPI data was released for the 12 months ending in January of 6.4%, down from December of 6.5% and 7.3% in November, continuing its gradual decline since June (9.1%)! Whilst this is still a decrease it is much lower than expectations and suggests a long-awaited slowing in the rate of progression. On Thursday 2^nd February, in the UK the Bank of England announced an 0.5% increase in interest rates to 4%. As expected, they did not follow the US in targeting a reduced pace of 0.25%. Furthermore, in the UK CPI data released was 10.1% for the 12 months ending in January down from 10.5% in December, 10.7% in November and 11.1% in October. On this occasion, this was softer than consensus expectations and the reduction pattern is continuing in the UK. Also, on 2^nd February the European Central Bank (ECB) announced a 0.5% increase in their interest rates to 2.5%, and the ECB have ‘pre-announced another increase of the same size for March 16’[i]. The ECB continues to  present itself as being particularly hawkish under the stewardship of Madame Lagarde.

In Bond Markets, ‘Germany’s 10-year yield, the benchmark for the euro area, rose 7 basis points (bps) to 2.66%, its highest since July 2011’[ii] and the same has been seen in both France and Spain where yields have hit their highest levels in many years. Both the UK 10 Year Gilt and US 10 Year Treasury Note yields have surpassed their January levels, both increasing to just under 4% after an initial drop at the beginning of February. The US Dollar has regained its losses from January against Sterling, the Euro and the Japanese Yen. Gold, after reaching a high level at the beginning of February has returned to levels at the start of January. Prices for gold at the end of February ‘were headed for their biggest monthly decline since June 2021 as a stronger dollar and fears that the U.S. Federal Reserve would keep raising interest rates weighed on the non-yielding asset’s appeal’[iii]. We are seeing a very uncorrelated performance from assets including what was once considered the safe havens.

On 11^th February, Fumio Kishida, Prime Minister of Japan, nominated Kazua Uedo as the next Governor of the Bank of Japan, who is set to take the reins after 8^th April when Haruhiko Kuroda steps down. This has come as a surprise as originally the Deputy Governor Masayoshi Amamiya was viewed as being the front runner.

After several countries, including the UK, the US and Germany agreed to send military battle tanks to aid Ukraine in January, President Volodymyr Zelenskyy of Ukraine has been touring Europe in an attempt to drum up more military support. Firstly, he flew to the UK to meet with Prime Minister Rishi Sunak whom, after their meeting, is providing NATO-style training to thousands of Ukrainian soldiers and marines from the UK. Rishi Sunak is also considering his options to offer fighter jet planes. Zelenskyy then flew to Paris meeting with Emmanuel Macron and Olaf Scholz before flying to Brussels where he addressed the European Parliament, meeting with twenty-seven heads of state asking for European Unity. In the run up to the one-year anniversary of Russia’s invasion of Ukraine (24^th February), US President Joe Biden travelled to Kyiv on Monday 20^th February and later met with NATO leaders on the eastern flank to highlight geopolitical tensions. We are seeing clear escalations in the Russia invasion of Ukraine.

On 27^th February a new Brexit deal was signed by the UK and European Union known as the Windsor Framework, which attempts to deal with the problems created by the Northern Ireland Protocol, binding international law obligations. One of the key issues has been checks on goods travelling from Great Britain had created a border with Northern Ireland and hence certain goods were no longer able to reach them. The Windsor Framework will, as Rishi Sunak has said, ‘ease trade between Britain and Northern Ireland, firmly root the province’s place in the United Kingdom and give lawmakers there a say in whether they must implement EU law, with London having a veto’. [iv] There is a long way to go and this needs to be approved by all parties but is a positive step forward for Brexit and will hopefully open up more lines of trade.

Overall, February has been reasonably volatile across various asset classes, with Large-Cap UK Equities in particular having hit an all-time high. Brent Crude fell sharply in value at the beginning of the month (below $80 per barrel) but has since recovered to c.$84 a barrel. 10 year bonds are increasing in yield, with various countries now having reached all-time highs. The US Dollar has gained strength back from its lows of January against Sterling, the Euro and the Japanese Yen. Geopolitical tensions are rising with Russia’s invasion of Ukraine.

[i] https://www.reuters.com/markets/rates-bonds/hawkish-ecb-comments-push-up-rate-hike-expectations-2023-02-17/

[ii] https://www.reuters.com/markets/global-markets-wrapup-1-2023-02-28/

[iii] https://www.cnbc.com/2023/02/28/gold-faces-worst-month-in-nearly-two-years-on-us-rate-hike-dread.html

[iv] https://www.reuters.com/world/uk/risk-taken-uks-sunak-announces-windsor-framework-2023-02-27/

by Haith Nori

January has seen an increase in global equity markets after a slightly volatile December. Central Banks are hosting their next interest rate meetings at the beginning of February, giving January a little rest. China has continued to open up after intense lockdowns with a release of 3% GDP growth in 2022, the second slowest rate of economic growth since the 1970s. Many emerging market economies are also coming back into the limelight offering lowly valued equity markets and attractive sovereign bond yields.

On 12^th January, promising data presented itself for US inflation which, for the 12 months ending in December, came in at 6.5%, down from 7.3% in November and continuing its gradual decline since June, marking the sharpest monthly fall in US CPI figures since mid-2020! Furthermore, in the UK CPI data released was 10.5% for the 12 months ending in December, down from 10.7% in November and 11.1% in October. Whilst progress is slower than in other parts of the world, a trend is beginning to emerge in the UK inflation data. The next meeting about interest rates will be 31^st January – 1^st February for the US Federal Reserve and 2^nd February for both the European Central Bank and the Bank of England. Global markets are waiting with bated breath to see how Central Banks approach their next steps in controlling inflation and if we are to see a reduction in the scale and frequency of hikes. ‘UK wages grew at the fastest rate outside the pandemic period at the end of 2022’[i] up 6.4% on an annual basis, marking the largest increase since 2001. The rise in wages strengthens the case for the Bank of England’s Monetary Policy Committee to keep raising interest rates, although any further hikes should be finely balanced in the context of weaker economic growth expectations and a more challenging housing market. Whilst wage growth is good news for households in the UK, figures have still failed to keep up with inflation. Both the US 10 Year Treasury Note and the UK 10 Year Gilt have decreased in yield since the beginning of January 2023. On Wednesday 18^th January, the Bank of Japan made no policy changes as expected, keeping its yield curve control targets in place (0% for 10year yield and -0.1% for short term interest rates).

Emerging market debt has come back onto investors radar screens following a difficult period in which the US dollar rose strongly. When the dollar rises, many developing countries local currencies tend to depreciate given typically high external debt positions, which are most often financed in dollars. They will see higher imported inflation with food and oil prices. Dollar strength tightens financial conditions for some emerging market countries and can affect the availability of credit. ‘The dollar has depreciated 7% since its highs in October, pushing EM assets higher’ [ii] as the two have historically have an inverse relationship. Analysts have suggested there could be room for further outperformance from emerging markets as the dollar may continue to depreciate. Many of the emerging market countries began increasing interest rates early in 2021, long before the Federal Reserve and many other Central Banks of developed countries across the world, which has resulted in many emerging market countries offering some very attractive yields. Examples, of where some 10 year Government Bonds are yielding are: Brazil c.13.19%, Mexico c.9%, Egypt c.20.1%, Zambia c.30.19% and Turkey c.10.7% to name just a few.

The CBOE (Chicago Board Options Exchange) Volatility Index (VIX), which is a real time index representing market’s expectations for volatility over the coming 30 days, has been on a steady decrease since October which coincided with the US dollar’s all-time high. Gold has also been on a steady increase in price since October. Both Sterling and the Euro have increased against the dollar steadily since the end of September 2022. China has continued to show positive signs of growth since it began to re-open after lifting its zero-covid policy. This has been especially helpful for business over the period of Chinese New Year.

The International Monetary Fund (IMF) on Tuesday 31^st January raised its Global Growth outlook for 2023. This is due primarily to demand in the US and Europe, alongside China’s re-opening and a significant easing in European energy costs. The IMF has ‘said global growth would still fall to 2.9% in 2023 from 3.4% in 2022’, [iii]  however this is an improvement from the October 2022 prediction of 2.7% with the warning of the world tipping into recession. Following the 2023 prediction, the IMF has also stated that global growth would accelerate to 3.1% in 2024. Whilst progress is slow, there is at least some positivity that can be taken from their outlook, in which they revised China’s growth forecast much higher for 2023, from 3% to 5.2%.

Many countries have been answering the calls of Ukraine for additional support in the ongoing crisis with Russia. Germany made an announcement on 25^th January to supply 14 military battle tanks and encouraged other European countries to do similar The US later that day also declared further aid with the supply of 31 tanks. Finland, Poland, the United Kingdom, Spain, the Netherlands and France are also considering making contributions. This is a major development in the situation.

Overall, January has welcomed back some positivity within global markets. Brent Crude dropped sharply in value at the beginning of the month but has recovered its value above the December highs, ending at just under $85 per barrel back up from the lows of December ($76.10). US and UK bond yields continue to fall and are becoming less attractive relative to some emerging market bonds, which have the potential to deliver very attractive real returns to investors.

[i] https://www.ft.com/content/b25fd8d7-f7bd-4501-8a32-21d338846f85

[ii] Look who’ emerging as the biggest star of 2023–Points of no return, John Author’s

[iii] https://www.reuters.com/markets/imf-lifts-2023-growth-forecast-china-reopening-strength-us-europe-2023-01-31/

by Haith Nori

Global equity markets in December saw a slight decline from their November highs in the run up to the holidays. Central Banks have hinted at slowing their interest rate hiking programme with the FOMC, BOE and ECB all raising interest rates by 50 basis points, lower than previous interest rate hikes of 75 basis points. This may pave the way for a potential end in sight. China has been easing lockdowns, re-opening areas around the country and lifting international travel restrictions. China’s re-opening should be better for business globally. The Bank of Japan also made a surprise announcement to change its bond yield control policy.

The US Federal Reserve made the decision to increase interest rates by 0.50% on 14^th December 2022 which confirmed what the markets were expecting. This is the first 0.50% increase as the past four consecutive meetings, the US Federal Reserve have increased by 0.75%. Promising data has presented itself for US inflation for the 12 months ending in November 2022 of 7.3%, continuing its gradual decline since June. The decision to opt for a 50 basis point hike shows positive signs that inflation is reducing and confirmed that the beginning of a reduction in the pace of policy tightening has started. For the first time UK CPI data was encouraging, releasing a figure of 10.7% for the 12 months ending in November. Whilst this figure is still very high, we have seen a reduction from October’s figure of 11.1%. On 15^th December 2022, The Bank of England also decided to raise interest rates by 0.50% to 3.5%, as analysts had been expecting, which, like the US, was also a reduction from the previous hike of 0.75%. On the same day the ECB made the decision to join the interest rate train by also increasing interest rates by 0.50%, pledging ‘further hikes and laid out plans to drain cash from the financial system as part of its fight against runaway inflation’[i]. Global Equity Markets reacted negatively to the interest rate news, which was all released in two consecutive days. The UK 10 year Gilt yield, the US 10 year Treasury Note yield and the 10 Year Bond yield all increased after the news was released and ended the month higher than at the beginning of the month. Global Markets reacted negatively to the Central Bank announcements in December 2022 but had a late surge, or Santa Rally, in the run up to the Christmas holidays. Sterling continued to decrease for the latter half of December against the dollar following the interest rate decisions, whereas the euro, after an initial decline, recovered to the end of December. Reaching the end of 2022, the US equity markets have had their worst year since the financial crash in 2008.

Elon Musk made an astonishing announcement that he would generate a survey amongst his 122 million followers as to whether he should step down as CEO of Twitter and pledged he would honour the decision of the results of the poll, be it negative or positive. A total of c.57% voted yes and Musk has since stated that he will step down once a suitable replacement is ready to take the reins.

On 20^th December 2022, The Bank of Japan shocked markets ‘with a surprise tweak to its bond yield control that allows long-term interest rates to rise more, a move aimed at easing some of the costs of prolonged monetary stimulus’[ii]. Following the unexpected news, Japanese shares reacted negatively whilst both Japanese bond yields and the Yen increased. This caught many investors off guard given that analysts widely expected no change to yield curve control, especially in the run up to Governor Haruhiko Kuroda stepping down in April 2023. The decision was meant to ignite the dormant bond market. Hopefully, stability will be restored.

In the UK, manufacturing has seen a decline as there is less demand for new business. December saw the fifth consecutive month of contraction, as ‘British manufacturers are starting 2023 on the back foot, after they reported one of their sharpest falls in activity since the 2008-09 recession last month, reflecting a sharp fall in new orders and ongoing job cuts’[iii].  Unemployment rates have also risen in the UK as there are less vacancies available.

With China coming out of lockdown and ending their Zero-Policy Covid restrictions the country is seeing stocks improve in price on the basis that business, both domestic and international, will hopefully resume. Travel restrictions have been lifted allowing international travel from China but many countries including the US, the UK, Italy, India, Israel, Spain, Canada, South Korea, and France are all imposing the need to have a negative Covid Test and in Spain’s case, proof of vaccination. This is a positive step forward as ‘China may finally return to normal as the nation joins the rest of the world in learning to live with the virus’[iv]. There is still a long road to recovery ahead for China, but Global Markets will benefit from the good news and the new opportunities it will present.

Overall, December has still been slightly volatile for Global Markets but did not experience too many significant market shocks. Brent Crude continues to trade below $85 having dipped to a low of c.$76.10. The Federal Reserve has hinted at maintaining lower levels of interest rate hikes whilst the ECB stated there is still a large fight against inflation to go. Central Banks are continuing action to bring inflation down but at a calmer pace. The re-opening of China brings positive news to Global Markets. Japan has made a surprise move in its control of bond yields causing a shock. Bond yields have increased since the start of the month following the interest rate decision release.

[i] www.reuters.com/markets/europe/ecb-slow-rate-hikes-lay-out-plans-drain-cash-2022-12-14/

[ii] https://www.reuters.com/markets/rates-bonds/japan-set-keep-ultra-low-rates-doubts-over-yield-cap-grow-2022-12-19/

[iii] www.reuters.com/markets/europe/uk-manufacturing-ends-2022-low-orders-shrink-pmi-2023-01-03/#:~:text=LONDON%2C%20Jan%203%20(Reuters),orders%20and%20ongoing%20job%20cuts.

[iv] https://edition.cnn.com/2023/01/02/china/china-2023-lookahead-intl-hnk-mic/index.html

by Adam Jones

As 2022 draws to a close we wanted to briefly highlight the exceptional uncertainty in investment markets as we head into 2023. We retain a cautious stance in portfolios overall but also see compelling arguments as to why things might turn out to be far less gloomy than seems widely expected.

Despite global PMI’s stabilising but still being in contractionary territory in November, December ISM Services data pointed to a very robust US consumer, whose confidence in spending has apparently yet to be curtailed by tighter monetary policy. Except for housing there appear few signs of restraint in broader US activity, giving rise to suggestions that the lag in monetary policy effectiveness may be longer than originally thought (and may not be evident until the end of H1’23). Recent declines in both oil prices and headline inflation data might also provide additional support for ongoing strength in consumption trends.

Source: Hottinger Investment Management / Refinitiv Datastream

In China, zero-covid policies have weighed on economic sentiment so much that recent street protests have led to a relaxation in policy that saw the Hang Seng index in Hong Kong become the strongest performing equity market in November, although most of these gains have since been erased given the recent uptick in new cases. On the economic front, one of the metrics we follow closely is known as the ‘credit impulse’ which simply measures the growth in new credit being provided to an economy relative to its GDP. In China the credit impulse has risen materially over the past few months and has historically led expansions in the global monetary base as defined by M2 (a measure of money supply which includes both cash deposits and instruments which are easily convertible into cash). While we do not consider ourselves to be explicit monetarists, it is interesting to note that expansions in global M2 have themselves tended to lead many of the major business cycle indicators such as manufacturing and output.

Should inflation continue to dissipate as global economies stabilise, this dynamic could turn out to be very supportive for risk assets in general. In this scenario investors, whose perspectives are almost universally bearish according to some measures of sentiment, are potentially at risk in being under-allocated to global equities.

This is the period when strategists and economists publish their forecasts for 2023 and Absolute Strategy Research (one of Hottinger’s key research partners) are not alone in believing that core inflation in US and Europe will be below 3% by the end of next year. Supply chains have generally normalised, the tightness of the labour market has not led to a wage spiral, falling commodity prices, and falling housing costs all combine to create a disinflationary trend. Central banks tend to be slow to cut rates, preferring to see consistently worse data and we believe there is a possibility that there are demographic changes involving retiring baby-boomers that could keep the labour market tighter than expected and over a longer transition period.

Source: Hottinger Investment Management / Refinitiv Datastream

Looking at corporate bond markets we also note that despite US high yield credit outperforming investment grade credit this year (even while lower-rated credit spreads have doubled), overall spreads remain well below levels witnessed in prior periods of forthcoming recession. We believe part of the explanation for this dynamic is that many businesses took advantage of exceptionally low refinancing rates post-Covid in 2020 to lock in lower rates over longer time frames (and hence significantly extended the maturity profile of their debt). If this is the case, then it stands to reason that a tighter monetary policy environment is likely to exert less of an effect on the corporate sector than it may have done historically.

The counterargument to this more optimistic view of 2023 is that savings rates in the developed world have now fallen back to (and in some cases below) pre-Covid levels in many countries. When coupled with recent witnessed spikes in credit card spending data this suggests a growing need for consumers to supplement the cost of living through short term finance. This is not typically a sustainable trend over any reasonable period, and we speculate may be a contributing factor to the weakness in US November retail sales last week.

Source: Hottinger Investment Management / Refinitiv Datastream

So, while global equities may have rallied approximately 10% over the last 2 months our baseline view remains that this represents a bear market rally. Equity and credit markets appear unwilling to price a more recessionary earnings outlook and cyclical sectors have barely underperformed more defensive sectors. It is only government bond markets which strongly suggest a forthcoming recession, with the yield curve having now inverted by more than 70bps (that is to say that 2yr bond yields are now greater than 70bps lower than 10y yields). In our opinion there are inconsistencies in 2023 forecasting based on the idea that investors have no reliable evidence of the monetary policy lag that will likely catalyse recession.

At the crossroads there are several scenarios, ranging from a soft landing to long and variable monetary policy lags causing a deep recession in 2023. The distribution of potential outcomes remains exceptionally wide due to high levels of prevailing uncertainty. Indeed, the last time an inflationary environment required so decisive a tightening cycle as that we have recently witnessed was back in the early eighties. We would argue that the global economy has evolved markedly since then in terms of demographics, labour market structure, global trade, technology, information dissemination and the implementation of monetary policy itself (forward guidance as an example). Such comparisons are therefore difficult and potentially misleading.

We remain cautious at this point, with an asset mix in favour of quality over cyclical growth, a preference for strong balance sheets, high cash flow yields and low levels of gearing with an overweight position in cash and government fixed income, where rates have become attractive for the first time in many years. We believe that despite a level of prevailing pessimism the spectrum of potential outcomes may lead to increased volatility and swift market reactions that would make disengaging from markets in a meaningful way a risky strategy for the long-term investor.