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Market briefing 51

Market Briefing (no.51) – 31st January 2023

Looking back and looking forward

2022 has come and gone with the war in Ukraine causing untold human misery and economic ramifications, including massive increases in energy prices. In turn inflation rose sharply with central banks reacting by increasing interest rates dramatically for the first time in over a decade.

So, have did markets react in 2022?

Context is always important, and so reviewing two major global stock markets in 2022 is a good place to start.


Graph 1 above shows a major US stock market versus a major UK stock market, (both priced in British pounds). The message is clear; as represented by this stock market, the UK outperformed the US by over 12% last year. Context is important, however. Before the recent relative outperformance, the UK stock market had lagged other major developed markets such as the US for many years by a considerable degree. Most major stock markets across the globe had a very poor year, putting the UK returns in perspective.

Why did this relative performance happen in 2022? The list is many and varied but can be explained by two main reasons: higher exposure to energy, utilities and mining stocks combined with a significantly lower exposure to technology and consumer services, saw the UK market outperform.

With 2022 now in mind, what will happen in 2023?

As always, past performance cannot be seen as a guide to what happens in the future. However, reviewing what 2023 has done so far – although only a month old – perhaps provides some insight.

As graph 2 below shows, the US stock market has recovered during the first month of this year, although the UK stock market continues to marginally outperform as energy stocks still exhibit resilience in their value.

Whilst remembering that none of us have a crystal ball about the future, and as stated above, ‘past performance is no guide to future returns’, the International Monetary Fund (IMF) has published its global economic outlook for 2023 (3).

Starting with Gross Domestic Product (GDP), the IMF published their estimated final statistics for 2022, combined with their predictions for 2023 and 2024.

Graph 3 shows the GDP numbers for the G7 countries. The UK has mixed results; 2022 – consistent with the major stock market results in graph 1 – had a good year, seeing itself top of the seven countries. 2023 is not so promising however, as the UK is predicted to become the only G7 economy to see its GDP contract into negative territory, with the prediction for 2024 joint last (with Italy and Japan).

Market briefing 51 graph 3

In addition to the G7 countries, graph 4 shows the GDP over the same time periods but for some emerging market countries that are sometimes known as the ‘BRICS’; Brazil, Russia, India, China and South Africa. The IMF makes particular note of the Chinese numbers. They say, ‘the rapid spread of COVID-19 in China dampened growth in 2022, but the recent reopening has paved the way for a faster-than expected recovery.’ They continue, ‘accelerating COVID-19 vaccinations in China would safeguard the recovery, with positive cross-border spillovers.’ (3)

Market briefing 51 graph 4

Inflation

Discussing inflation, under the heading, ‘Monetary policy starts to bite’, the IMF report said, ‘signs are apparent that monetary policy tightening is starting to cool demand and inflation, but the full impact is unlikely to be realized before 2024. Global headline inflation appears to have peaked in the third quarter of 2022.’ (3)

The OECD (Organisation for Economic Co-operation and Development) graphs below (5) support the IMF’s opinion that inflation is cooling from the elevated levels seen recently. Graphs 5 and 6 show actual inflation up to the end of 2022 (blue shading) for the UK at 10.1% (graph 5) and the US at 7.1% (graph 6), with forecasts predicting inflation falling during this year (purple shading), up to the end of Q4 next year (2024) at around 3%.

Market briefing 51 graph 5&6

Financial markets’ reaction?

The IMF predict that ‘financial markets are displaying high sensitivity to inflation news, with equity markets rising following recent releases of lower inflation data in anticipation of interest rate cuts despite central banks’ communicating their resolve to tighten policy further.’ (3)

2023 outlook?
  • Except the UK, all G7 and BRICS countries will see GDP growth over the next two years
  • Inflation will fall significantly in 2023, ending 2024 at around 3%
  • China’s post Covid recovery will continue helping to stimulate global growth
  • Financial markets will see growth, albeit low and slow and dependent on interest rates being cutby central banks
Risks to 2023 outlooks?
  • China’s recovery stalls amid still-low population immunity levels and insufficient hospital capacity to cope with Covid outbreaks.
  • War in Ukraine escalates which amongst other issues would again hurt Continental Europe’s reliance on Russian gas, combined with renewed increase in food prices.
  • Debt distress for households caused by a combination of high debt levels from the pandemic, lower growth, and higher borrowing costs as interest rates do not fall.
  • Inflation persisting caused by persistent labour market tightness and higher-than-expected oil, gas, and food prices from the war in Ukraine. A faster rebound in China’s growth could also raise headline inflation.
  • Geopolitical fragmentation such as the war in Ukraine, the related international sanctions aimed at pressuring Russia to end hostilities and the potential reinforcing of historic geopolitical tensions, such as thoseassociated with the US-China trade dispute, will likely cause uncertainty in global markets.
What should this tell you?

It’s important to remember that ‘past performance is no guide to future returns’, no matter what statistics esteemed organisations’ research and present. It is also important to remember that investors generally should have longer term investment time horizons than the 2 to 3 years covered above.

In addition, the above data reviews only certain – albeit large – geographical areas. Investors should likely be smarter and broader regarding their investment diversification. This could include a wide spread of geographical areas, asset types, styles and philosophies.

As we have said many times before, we will continue to monitor the current financial situation and keep you notified of any significant changes that are made. Please contact your Foster Denovo Partner if you wish to discuss your financial situation further.

At times like these, it is even more important that you are taking advice on your finances by a qualified and experienced financial planner. If you think any of your friends, family or colleagues would benefit from speaking to us, especially in the current situation, then please introduce them to your Foster Denovo Partner who would be happy to help.

Key Indicators up to 31st December 2022

The ‘Key Indicators’ shown in the table to the left are designed to provide an overview analysis of different asset types, different geographical jurisdictions and industrial sectors.

They also include statistics that show the changes in inflation, property – both residential and commercial – together with how UK base interest rate and ‘high street’ interest rates change.

The comparison period is over 1 year and compares the difference on a monthly basis over that 1-year period.

For example, this version compares the statistics for all key indicators between 30th November 2021 and 30th November 2022 against 31st December 2021 and 31st December 2022 (the most up to date data available).

Every quarter the key indicators will also include data that is published quarterly in arrears, for example UK Gross Domestic Product (GDP) and unemployment figures for the UK and where available overseas geographical jurisdictions.
The source of this data unless stated otherwise is FE Fundinfo (2).

Sources

1) https://www.forbes.com/profile/carlos-slim-helu/?sh=7fdf9a6b646b
2) Financial Express Fundinfo
3) https://www.imf.org/en/Publications/WEO/Issues/2023/01/31/world-economic-outlook-update-january-2023#DataTools
4) https://www.investopedia.com/terms/g/gdp.asp
5) https://data.oecd.org/price/inflation-forecast.htm#indicator-chart
6) https://www.onthisday.com

This publication is marketing material. It is for information purposes only. This statement is for the sole use of the recipient to whom it has been directly delivered by their Foster Denovo Partner and should not be reproduced, copied or made available to others. The information presented herein is for illustrative purposes only and does not provide sufficient information on which to make an informed investment decision.

This document is not intended and should not be construed as an offer, solicitation, or recommendation to buy or sell any specific investments or participate in any investment (or other) strategy. Potential investors will have sought advice concerning the suitability of any investment from their Foster Denovo Partner. Potential investors should be aware that past performance is not an indication of future performance and the value of investments, and the income derived from them, may fluctuate and they may not receive back the amount they originally invested. The tax treatment of investments depends on each investor’s individual circumstances and is subject to changes in tax legislation.