Thanksgiving duly delivered another quiet week. Both equity and bond markets had a little seasonal cheer, the oil price fell and the pound had a decent bounce. So rather than dwelling on last week’s mundane events and trying to pretend that something interesting had happened (which hopefully we would never do), we can use the time this Monday morning to look ahead to 2023.
We are very aware of the limitations of both fortune-telling and economic predictions. It is also true that an ability to foresee certain events is not necessarily any help in coming to the right investment decisions. Possibly the best illustration was that those who believed Donald Trump might win the 2016 US Election generally sold their investments, their houses and their grandparents before dashing off to Montana. Whereas, as we know, the markets treated Trump’s election with joy.
Now that we have fully covered our backsides and our weaknesses, we can forecast to our hearts’ content. First of all, 2023 will be a better year than 2022. That is, of course, a very low bar. But this year has been one of rising inflation and interest rates. Next year will be the reverse, eventually. That will help both equity and bond markets, though the latter in particular has already seen this coming. The yield on the UK 10 year gilt, for example, is now only a smidge over 3%, having been over 4.5% in early October. The fall in yields in the US has been less pronounced, but is still significant. Bond investors are predicting that if inflation has not yet already peaked, then it is on the last leg of the ascent, and also that monetary policy will be being loosened again before next year’s letters to Santa are stuck in the post strikes.
2023 is a year in which we ought to see a material acceleration in the rate of investment into renewable energy. Despite the Ukraine war, despite the obfuscation of COP27, despite Saudi’s seeming attempt to buy the World, everyone knows that we have to have local and renewable sources of energy. The modern world, the world of the internet, is more dependent upon power, and therefore more fragile, than ever. The solution to a reliance on Russian gas is not a reliance on Saudi, or US, or Norwegian gas; it is robust, local and non-carbon energy supplies. This has two further offshoots. First, battery storage technology and capacity will be highly prized. Second, there will be much greater investment into nuclear energy, both large and small-scale. We should add that we remain profoundly sceptical of nuclear’s ability to be able to deliver, based on a) the cost, b) the time needed to build the power stations, c) the jump in technology needed and d) its pretty dreadful track record of unreliability.
Something in China will have to give next year. The Communist Party retains power by providing a naturally restive population an ever increasing personal wealth. So long as everyone is happy, no one revolts. That has long been accepted by all sides. President Xi’s zero-covid policy looks as if it is stretching this compact to breaking point. Either zero-covid has to go, or else monetary policy will need to be loosened very significantly. Or, perversely for a man who has just taken such a firm grip on the Party, Xi has to go. Whichever way one cuts this pie, change is inevitable and necessary. Big stimulus is likely to come first, accompanied by a big crackdown. It will all be unsettling for markets, who will not know what they should make of it.
Amidst all this prediction, we should absolutely emphasise that we buy stocks, not markets. Trying to guess when an Index will peak, trough, or even change direction is a game for those who believe that they are far more clever than us. What we can do, though, is to identify stocks, or sectors, where we can see qualities that grab us by parts of the anatomy that demand attention. Broadly, these fall into two camps: First, these can be valuations which tell us that, barring an economic catastrophe, these assets must provide hugely attractive returns. As one way of looking at this, there is now an extraordinary number of stocks where the yield and price/earnings (p/e) ratio are much the same, or even where the yield is higher than the p/e. If one then screens out those businesses that have such miserable ratings on merit, what is left is necessarily a collection of good quality and very cheap shares. What one needs is the patience to ignore whatever may happen between now and not just Christmas, but probably Easter. Short-termism and impatience are the greatest threat to successful investment.
Our second camp is those industries that are undergoing, and will benefit from, the massive structural shifts that we are seeing in global economies. Never mind COP27, the world is going to decarbonise anyway. Russia’s weaponisation of energy will drive ‘energy-independence’ at a rate never before seen. The move of ‘ESG’ from an investment style into one of business-as-usual corporate behaviour will also create massive opportunities, in waste reduction, in energy efficiency, in welfare and especially in training and education.
So what we have is reason to view 2023 with considerable optimism, despite everything. Despite inflation, despite the rising interest rates, despite COP27, despite the politics, despite the unrest in China, despite Russia and Ukraine, and even despite bitcoins. Despite everything, there is so much to look forward to in ’23.
This is my last Innovation of ’22, as I head off to check on the impact of inflation on South-East Asia. I leave you in the fine hands of the Research Team and wish everyone a very Merry Christmas and a wonderful New Year.
Finally, congratulations to the impressive number of Eagles fans who knew last week’s reference to Joe Walsh and Life’s Been Good. Today, “My bags are packed I’m ready to go.” The opening lines to which singalong (for those of a certain generation)?
Jim Wood-Smith – Market Commentator and Head of Climate Transition
FPC694
All charts and data sourced from FactSet
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