By Rebecca Ellis
MON. 06 FEB, 2023-theGBJournal| 2022 might have felt like being a passenger on a slow-motion Titanic, gradually sinking and with a grim end in sight. All asset classes took their lumps, and the year was indeed a bleak one for most investors.
The press often refers to “bulls” and “bears”, and these animal spirits replicate the spirit of the market. The “never say die” attitude burns strong in the human psyche and is one of the key drivers of financial markets.
Market sentiment is deeply linked to our human expectations, which have driven markets and prices since people began investing.
The bulls tend to be exuberant – sometimes irrationally so, as the former Federal Reserve Chairman Alan Greenspan once famously complained – while the bears sometimes see doomsday and Armageddon scenarios in every market blip.
These biases tend to cloud our reasoning. Our role as your advisors is partly to help ensure that emotions such as fear, greed or indeed the fear of missing out (FOMO) don’t override reality, and that our focus remains on achieving your objectives and return requirements. Our task is not to let sound bites alter our plan, but rather to identify opportunities that can add value to your long-term goals.
And what does this mean in 2023?
The bulls have been out in force since the New Year. As we see below, the markets appear keen to move forward on a positive note.
Inflation would appear to have peaked in the USA – a delayed data point, but one which was certainly expected. It is without doubt a positive development as the cost-of-living falls, allowing us to save more of our hard-earned income following the shocks of 2022. But there remains some overhang in 2023, where factors to consider will include:
- The reversal of China covid policy and the reopening currently underway
- The Ukraine-Russian war, and the resulting scarcity effect on food and energy supplies
- The collateral effects of global covid policies
- A rising interest rate environment
Global inflation concerns have killed off the ultra-low interest rate environment that has prevailed since the Financial Crisis of 2008. Though market exuberance helps portfolio values to recover, we need to consider if this recovery has a sustainable basis in more concrete factors.
Let’s break it down!
Rising interest rates are positive news for your pensions and rainy-day funds. They have also put fixed-income and risk-free cash vehicles back on the map for investors looking for a diversified risk approach. After 10 years in which property and equities were the only asset classes worthy of investment when seeking positive returns, the bond market has reawakened and investors now have at their disposal less volatile securities to help achieve their objectives.
The Federal Reserve, the US central bank, holds the keys to the kingdom of the world’s principal open economy. There was no fundamental change in the bank’s outlook between December 2022 and January 2023. Yet the market has been off to the races since the start of the year and the momentum from January may be set to continue. When the message is no different and yet the effect on financial markets changes, we have to question why?
Structural issues remain real, a recession is widely expected before a new bull market can start, and inflation is decreasing, even though it remains above the last century’s average rate of 3.19%p.a. Capital and credit are no longer cheap, and this has hit private individuals and companies alike. This will mean companies need to allocate more to pay debt interest, and this is likely to lead to a reduction of capital expenditure and productivity. Moves to enforce a more regulated environment for some technology firms will entail costs that reduce profits and market valuations.
While improvements such as falling inflation are welcome, we need to keep it real. The exuberance of the markets should be used as a tool to rebalance your portfolio to include asset classes beyond just equities and the US markets.
Building a recession-proof portfolio requires equities that go beyond the growth sector, which was very profitable after covid. The arrival of interest rates also means the approach from 2010-2021 requires a rethink.
Your objectives are central to the plan of how to navigate these financial cycles. When exuberance starts to appear irrational, it is time to take profits off the table and keep some dry powder for the next wave of change. Riding these waves will bolster profits in the sunnier days ahead.
Rebecca’s Swiss Perspective” helps you understand the economic perspectives, financial markets, and global trends which impact how we all live and how we make a place for ourselves in this world.
Rebecca Ellis, Family office advisor based in Switzerland– www.aktspartners.ch
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