George Square Financial Management Investment Market Update. In conjunction with Albemarle Street Partners
February 2023
You can’t have your cake and eat it too:
The last few weeks have unearthed a potential downside to the unexpected strength in the global economy. 2023 started with a plethora of positive economic data. European retail sales were better than expected, the US economy created 517,000 new jobs in January and Chinese industrial activity rebounded.
All the while, the main driver of investor anxiety, inflation, appeared to be in rapid decline. Markets started to price in peak monetary tightening and a benign recession for corporate profits. Risk assets (equities, high yield bonds and commodities) buoyed by high expected returns enjoyed their best start to a year since 2019.
Unfortunately, January’s inflation readings have scuppered hopes of the perfect landing investors wanted. While the base affect for inflation (the prior year price for comparison) creates meaningful downside pressure on inflation, month to month inconsistencies in the data can unsettle risk appetite.
Peak interest rate forecasts for the US have moved from 5% to 5.5% in recent weeks. This change creates some additional risk for cyclical assets and increases the probability that the Federal Reserve keeps policy tight for a protracted period.
We expect inflation to continue to fall, but a sharper decline in bond yields may need to be reassessed. The Fed has set a high bar for rate cuts and we may have to wait till the end of the year for there to be any easing in monetary conditions.
In the meantime, earnings, a key supporting factor for equity markets may start to wane. Fourth quarter earnings from the US were down 5% despite mid-single digit rising revenue growth. Analysts expect revenues to start to fall from the second quarter but margins to remain resilient. While this assessment is rooted in detailed bottom-up forecasts, they fly in the face of conventional wisdom. We are not forecasting a severe economic recession but see a risk to profit expectations in 2023.
Conclusion:
As we entered 2023, we saw signs that the tide may be turning. We increased diversification in portfolios by allocating to Asia, Europe, and parts of the fixed income market. These steps were purposefully modest as we envisaged a bumpy journey. This includes parts of the fixed income market and UK mid-cap stocks. As always, we will be patient and measured in our approach.
The value of investments, and the income from them, can go down and you may get back less than invested. Changes in currency exchange rates may affect the value of your investment. This material may include charts displaying financial instruments' past performance as well as estimates and forecasts. Past performance is not an indicator of future returns. Capital at risk.
© 2023 George Square Financial Management Ltd. All Rights Reserved. The content of this material is a marketing communication, and not independent investment research. As such, the legal and regulatory requirements in relation to independent investment research do not apply to this material and it is not subject to any prohibition on dealing ahead of its dissemination. The material is for general information purposes only (whether or not it states any opinions). It does not consider your personal circumstances or objectives. Nothing in this material is (or should be considered to be) legal, financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Albemarle Street Partners or George Square Financial Management Ltd that any particular investment, security, transaction, or investment strategy is suitable for any specific person. Although the information set out in this marketing communication is obtained from sources believed to be reliable, Albemarle Street Partners or George Square Financial Management Ltd. makes no guarantee as to its accuracy or completeness. Neither Albemarle Street Partners or George Square Financial Management Ltd. shall be responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein. Albemarle Street Partners is a trading name of Atlantic House Fund Management LLP (AHI). Issued by AHI who is authorised and regulated by the Financial Conduct Authority. Registered Office: 135 Bishopsgate, 8th Floor, London, EC2M 3TP. George Square Financial Management Ltd. is authorised and regulated by the Financial Conduct Authority