Bottom Line

This year will be the first full calendar year where more “normalised” monetary conditions do not provide a rising tide for all financial boats. It will likely result in much less consumer demand for goods, services and housing. Wages will continue to rise due to tight labour markets but remain under the rate of inflation for the next several months, at least. The combination of these factors should lead to reduced corporate capital expenditure, squeezed corporate margins and earnings downgrades, especially in real terms.

Therefore, we start the New Year carrying the same caution with which we ended the last one. Most strategies will remain underweight risk assets compared with their respective benchmarks. We also continue to hold cash, gold, hedge funds and government debt in most strategies to even out volatility from risk assets such as equities.

The economic outlook remains in slowdown judging by the forward-looking indicators we measure, and is now bordering “contraction” territory; suggesting a deteriorating environment for the economy and risk assets alike.
Valuations are “expensive”. Valuations have continued to rise marginally as analysts further downgraded their earnings expectations for 2023. Forecasts now assume an 8% contraction in S&P500 earnings, still below historical averages for recessionary environments, and we remain cautious on this measure.
Momentum for equities have returned to their negative trend as November’s rally failed to sustain into the year-end. We will be closely monitoring this factor for any signs of a new bull market emerging.
Sentiment in markets remains bearish, with global equity fund flows deteriorating significantly in December following the equity relief rally in November.

The next bull market will almost certainly begin before the economic clouds have lifted. As a result, we will seek to deploy some of our dry powder more meaningfully to risk assets as the risk-reward fundamentals become more favourable, particularly with regards to the economic regime or signals from our valuation, momentum and sentiment framework.

In accordance with the regulations in force, we inform the reader that this document is qualified as a promotional document.