Please see below, a daily investment bulletin article from Brooks Macdonald covering the key market news from around the world. Received this afternoon – 03/01/2023
What has happened
December ultimately proved a tough month for global equities with the US index off almost 6% as fears over hawkish central banks and economic growth combined to dampen the upswing in risk appetite seen in October and November. In the first few days of 2023, markets appear to be putting these negative thoughts behind them however the risks remain.
Q4 in review
October initially started very poorly for equities with US equities falling to their lowest level of 2022 halfway through that month. The downside misses in both the October and November CPI numbers set up a more positive backdrop from then on as investors hoped they had seen ‘peak inflation’ in the United States. Whilst the Fed, ECB and BoE all reacted to this data, slowing the rate of interest rate hikes to 50bps in December, the overall message from the Fed and ECB was that there was more to come. Importantly the Fed and ECB also stressed that interest rates may need to stay at the terminal, restrictive rate for longer in order to ensure that inflation comes back down to target levels.
2023 preview
How quickly inflation falls from the current ‘peak’ levels is likely to be the primary determinant of how financial markets perform in 2023. Should inflation begin falling, but at a slower pace than markets hope, central banks will react by keeping interest rates elevated for longer. This will in turn have an impact on the real economy, making the Fed’s base case of an economic soft-landing look increasingly difficult. Equally, should inflation start to recede faster than bond markets forecast, this would take the pressure off financial market conditions at the same time as providing a boost to the economy through lower funding costs and improving real wage growth. Markets are likely to swing between these two camps in Q1 of this year, awaiting concrete data before concluding how inflationary pressures will evolve in the short term.
What does Brooks Macdonald think
2022 was a bruising year for bond and equity markets. Global bonds entered their first bear market in 70 years at the same time as US equities had their worst year since 2008. Below these headline figures, rapid changes in sector and investment style leadership have also whipsawed equity investors. With inflation fading, but at an unknown pace, we expect market leadership to continue to change suddenly in Q1 as it did in 2022, for that reason we maintain our barbell between growth and value investment styles for the new year.
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Alex Clare
3rd December 2023