Liontrust Views Winter 2023 - Flipbook - Page 11
rising inflation –
something seen across
many economies in 2022.
However, if inflation persists at a higher
level than hoped for, and wages continue
to rise due to inflationary pressures, then
we could see further interest rate rises
announced by the Bank of England in an
attempt to combat this.
While the question of what interest rates do
in 2023 should still be a consideration for
investors, with a less volatile environment
expected, the focus may be more on
companies’ fundamentals, including their
earnings and financial strength.
Global economy and recession
There has been much talk in the UK of a
prolonged recession – demonstrating our
national ability to view the glass as half
empty rather than half full, perhaps. Yet
while an economic slowdown is a genuine
concern, we believe that the global economy
remains on a solid footing and as a result
the recession will be less severe than many
expect. For example, the relaxation of Covid
restrictions in China in December is likely to
be a major positive for the world economy
by easing global supply chains and boosting
expectations of economic growth.
What does this all mean for where investors
might consider putting their money?
High yield bonds offer attractive spreads
Investing in bonds has traditionally been
seen as a low-risk strategy, but the opposite
was true in 2022 when market turmoil led to
bond prices falling around 16%. Yet as bond
prices fell, yields on those bonds increased.
This is because as bond prices fall, they
are viewed as more risky investments, and
so investors are ‘compensated’ with higher
yields. A yield is the return on the capital you
invest in a bond.
they are issued by companies rather than
the government and are more vulnerable
if economic conditions worsen in 2023.
In other words, if the UK suffers a deeper
recession than expected, the risk of
bankruptcy among companies will increase.
nothing can be ruled out, we expect the
performances of many types of financial
assets around the world to revert to more
long-term trend levels after the remarkable
outperformance delivered by US technology
growth stocks during the 2010s.
Not all sectors are equal, however. For
example, cash-rich energy companies are
better placed to deal with a downturn than
some other sectors, such as those offering
non-essential luxury goods, which may be
at risk. While the indications are that the
recession will be reasonably contained,
investors may still wish to consider investing
with cautious fund managers who actively
assess companies and are more suited to
this environment.
We believe emerging markets and smaller
companies (small caps) would benefit from
an economic recovery in 2023. Why?
Well, over time, we would expect the strong
economic growth trajectory, favourable
demographics, governance improvements
and risk premiums of emerging markets to
bear fruit for the patient investor.
“Going forward in
2023, we believe
a diversified, multiasset portfolio and a
long-term view will
be more favourable
for investors.”
In contrast, government bonds can provide
a buffer against inflation and the risk of
companies defaulting on their debts in an
economic slowdown, although the yields will
typically be lower as government bonds are
perceived to be lower risk.
While the yields available on bonds issued
by both governments and companies are
now back to more normal, long-term levels,
they are still significantly more rewarding
than they have been in recent years.
Reversion to longer-term trends
As highlighted, 2022 was a tumultuous
year for markets, with global equities
falling by around 19% during this period.
However, following a sustained sell-off by
investors, equity markets now look more
attractively valued.
Bonds with high yields (HY) offer very
attractive premiums but could inherently
be riskier for investors. This is because
Looking forward, there are risks, not least
further interest rate rises, but if inflation
continues to fall then this risk lessens. While
We are also optimistic that investors in small
caps will be rewarded over the longer-term.
This is on the basis that smaller companies
often have an ability to adapt quickly to
market conditions as well as the potential for
rapid growth relative to their size.
The importance of the long-term view
Going forward in 2023, we believe a
diversified, multi-asset portfolio and a longterm view will be more favourable for
investors to address market volatility and
reap rewards from across the markets.
Investors should therefore consider balancing
their portfolios between equities, bonds and
other asset classes.
The ride may well be bumpy. The economic
outlook is uncertain, and geopolitical risks,
and their potential impact on global supply
chains and inflation, cannot be dismissed.
Meanwhile, the war in Ukraine looks set to
continue for some time.
While those hoping for a raging bull market
in 2023 are likely to be disappointed, we
do anticipate stock markets will regain their
powers, especially in emerging markets
and small caps, and HY bonds generally
should do well. Bond yields are unlikely to
fall significantly, despite a likely easing of
inflation, given they are at a fair value.
Trying to predict when the recovery will come
and which asset classes will outperform is a
hazardous pursuit. However, when markets
turn upwards, it will happen quickly and if
investors are not already invested then they
will find it difficult to get back in quickly
enough to enjoy all the gains.
LIONTRUST VIEWS – WINTER
11