The year of 2022 was a tough one from a social, economic and investment perspective.  Will 2023 be as difficult?  For several reasons, we are optimistic about the next year.

We had a perfect storm in 2022, which was partly due to a build-up of supply and demand imbalances caused by the pandemic. The supply and demand imbalances were all over the place, from government support to shipping to semiconductors to workers.  Also, the way that China has dealt with the pandemic hasn’t been helpful to the imbalances.  This all led to a building of inflationary pressures.  We then had the Ukraine war, which made things much worse. 

Inflation has been a core reason for pressures in the last year, which has resulted in secondary effects.  Interest rates have risen sharply, which has put pressure on companies and consumers as debt costs rise.  This has and will have a negative on the economy.  We’ve seen social implications of rising food and energy costs, as well as an increase in industrial strike action as unions fight for inflation-linked wage growth.

Inflation is a year-on-year measure of price rises.  The latest CPI reading in the UK was 10.7% in November.  Despite the headlines, this level of inflation is unsustainable and we’re already seeing glimpses that inflation could fall quite sharply this year.  A third of the current inflation level is the cost of electricity and gas.  Another 10% is transport fuel.  For inflation to keep at these levels, we need these areas to rise by another 10% this year.  However, the current oil price (Brent) is $79 compared to $139 in March 22.  Gas prices are also falling, with the main European gas price now at its lowest point since November 2021, down to €64/MWh from €340/MWh in August.  All of this is strongly deflationary. 

We’re not expecting inflation to collapse to a point where it becomes overall deflationary (that might be next year), however a fall to 2-5% would be helpful for everyone. 

From an investment perspective, 2022 was unlike anything we’ve seen for a long time.  It was the first time in history that US equity and bond markets both fell by more than 10%.  It was the worst year ever for bonds (since 1788) and the 7th worst year for the US market.  For an average portfolio of 60% in equity and 40% in bonds, it was the third worst year ever, after 1931 and 1937.  This market has created an opportunity that we haven’t seen in a long time.  Bonds are now attractive.

We started adding US government bonds to portfolios last summer and have recently been adding UK corporate bonds to portfolios.  The expected return of these assets is similar to historic equity-like returns but with much less risk.  If inflation does calm down as we expect, this will help equity and bond markets. 

What are other issues that could help or hinder investors in 2023?  The war in Ukraine is still at the top of the list of things that could help or hinder investors as the potential positive or negative outcomes are so extreme.  It’s difficult to see any short-term positive outcome due to the entrenched political and social views of Putin. 

Another could be the size and severity of a recession.  It’s likely we’re already in one in the UK and Europe, largely due to the inflation and energy pressures.  The US is likely to follow but it’s not guaranteed.  The recent move in energy prices should help companies and consumers so we expect any recession to be shallow. 

It is often difficult to be optimistic when everything looks bleak.  However, the low expectation is one of the reasons why we are optimistic.  We don’t need things to return to the highs of 2021, things can be bad, just not as bad as expected.  That would produce some very good returns for 2023. 

I don’t make New Year resolutions as they are usually difficult to stick to.  However, last year I wanted to get fitter and made a commitment to run more.  I ended up doing 29 Parkruns, which is a 5km run hosted each Saturday at parks across the UK.  One reason why Parkrun didn’t become a January fad (7 of the 29 were in November & December), is because it became habitual.  We are creatures of habit.  If you want to make a change in life, build it in to your habits and I now feel guilty if I don’t do a Parkrun. 

If you want to chat about running, our market thinking or current portfolio positioning, please do not hesitate to get in touch.