Confidence without complacency
Each stock market year has its own characteristics and brings its share of special events. Some of these leave their mark on financial market history for decades. No doubt 2022 will be one of them. Equities and bonds dropped in sync, resulting in the worst performance by diversified portfolios since the 1930s. The breakout of the Russia-Ukraine war, the worst war on European soil since WWII, and the strongest monetary tightening since the 1980s, by virtually all the world’s central banks, in the face of a resurgence in inflation reaching several-decade highs – these are historic events that should usher 2022 into the very exclusive club of standout stock market years.
These events have also put investors to the test. After months in the red, with good news hard to find, will 2023 give them a little peace of mind? Clearly, in the short term, the economic outlook is gloomy. While it seems to have been good for containing inflation, which may have plateaued, the severity of monetary tightening is expected to set off a global recession. The ability of the central banks and governments to act will be limited: the first due to the persistence of high inflation, and the second to the rising cost of debt. This calls for caution on the equity markets, where valuations have collapsed, though not to the point where they can be classified as discounted, and earnings outlooks could be revised downward. However, in a long-term approach, falling equity prices and multiples in recent quarters point to a high likelihood of positive performance within the next couple of years.
Caution in the short term, then, with persistent high volatility and potential new setbacks. But certain weaknesses could leave room for some equity risk in the portfolios again. With this in mind, small and mid-sized growth stocks, which took such a hit in 2022, could offer promising opportunities. The other good news is that the big losers of recent years – bonds, especially private corporate bonds – are very attractive once again. With a highly promising carry once again, the upcoming end to the central banks’ rate hikes, and risk premiums partially pricing in an economic slowdown scenario, credit should actually take back its diversifying role in the portfolios.
As the age of zero interest rates and monetary stimulus comes to a close, investors will be faced with a seemingly less friendly environment, where the portfolio mix must be revised and diversified. This reinvention – based on the timeless principle of creative destruction – will clear the path to innovations for generating performance over the next few years.
Disclaimer: The opinions expressed in this document are the author’s own. LFDE shall not be held liable for these opinions in any way.
This month’s Editorial by Olivier de Berranger, Deputy Chief Executive Officer and CIO, and Enguerrand Artaz, Fund Manager, La Financière de l’Echiquier (LFDE)
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