Market Insights – October 2022

Current Topics in Markets

Inflation continues to be the burning issue dominating financial markets right now. Central banks continue to take aggressive steps in raising interest rates and lowering their bond holdings, in an attempt to keep inflation in check. The fact is that financial markets hate nothing more than uncertainty and they will remain volatile as long as the current batch of uncertainties persist. These outstanding uncertainties include:

• At what level is inflation in developed markets likely to settle?
• Where are interest rates likely to peak, particularly in the US?
• What kind of corporate earnings picture are we looking at for 2023?
• Just how bad a recession can we expect in 2023?

Unfortunately for all of us, central banks have simply been too tardy in identifying the inflation risk and are now playing catchup aggressively. As a result, global recession in 2023 seems a certainty. In Ireland’s case, both the Central Bank and the ESRI seem confident that Ireland can escape the worst of it. This view seems quite optimistic, particularly given the uncertainty around energy prices and supplies in Europe.

Despite the very uncertain picture at the moment, markets will settle over the coming months and history has shown repeatedly that recessionary times are not necessarily bad for financial markets and that they often go hand in hand with strong recovery phases. UBS, for example, have nailed their colours to the mast and their central scenario is for a bounce in markets in the first quarter of next year. Looking at history, its not an unreasonable view.

Equity Markets

September brought no good news for equity markets and all leading markets moved backwards, with China’s zero covid policy and property market problems pushing it into negative double figures for the month. Currency movements have had a huge influence over the past year for euro-based investors. A 30% fall in China is halved when converted to euros and a 15% fall in the US is fully neutralised by the strength of the dollar over the past 12 months.

While equity markets have not been kind to investors this year, it would certainly be a mistake to lose faith in equities. For the longer term investor, there is much better value in markets right now and there is also the prospect of recovery in 2023. Being selective about equity selection, as well as phasing new investment into the markets, are both strongly advised, however.

Equity Market Performances (percentage change in euro terms)

*Source Financial Times, Financial Express

Bonds

Bond markets have had a pummelling this year in response to rising inflation and interest rates, as well as the unwinding of quantitative easing. In our view, this reconfiguring of global bond markets has further to go and the market is unlikely to stabilise until the economic picture clarifies, probably some time in 2023. We remain cautious on mainstream bond markets in the meantime.

Property

During past inflationary cycles, property has proven to be a relative safe haven because of the trend for both rents and value to follow rising inflation. This cycle, things have been a little different and listed property vehicles have followed the downward slide in equity markets. As an asset class, property is anything but uniform, however, and while we retain a negative view of retail and suburban offices, we see very good value currently in other sub-sectors such as logistics, retail warehouses and healthcare properties.

Alternatives

Over the past two years, we have been advocating that clients include more alternatives (infrastructure, renewable energy, hedge funds) in their portfolios and, generally speaking, these options have delivered very well over the past year. Our particular selections in these categories have grown in value in 2022 when both equity and bond markets have fallen sharply. We continue to include them in advisory portfolios on the basis that many of these funds offer inflation beating characteristics, lower volatility and an attractive level of income.

As always, you should only consider the investment views contained in this Market Insights update in the context of your own attitude to risk and how such choices might impact your Asset Allocation model. Should you wish to discuss your investment portfolio, please contact Harvest Financial Services on 01 2375500 or email justask@harvestfinancial.ie.