The Bank of Japan has shown that its communications can be just as vague as those of the US Federal Reserve. With just three months left at the helm, Governor Kuroda once again surprised investors when he failed to follow through on the monetary policy tightening announced in late December. This could weigh on the yen’s rally in the near term.
Netflix stocks gained more than 8% on Friday after the company posted better-than-expected earnings. This helped to push up the rest of the tech sector too. More tech heavyweights are due to publish their earnings early next week, which could give the Nasdaq a boost after a tough year in 2022.
Alternative funds more or less broke even in 2022, which makes them much more appealing than other asset classes. In most cases, these funds have started off well in 2023 too – a sign that managers are capable of generating returns in different market conditions.
Europe - hope retrurns after a bit of excessive pessimism
It was an unprecedented phenomenon: after over a decade of grim performance, European equities started to rally in September, outstripping both US equities and all other major stock markets. This trend looks set to continue in 2023, surprising more than one investor. The reason for this sharp rally is that investors had been overly bearish on Europe due to expectations of a severe recession and harsh energy shortages. But instead, countries managed to build up their natural gas reserves more quickly than expected and even to levels that exceeded their targets. Gas prices have fallen by over 80% since the summer, which has provided a clear boost to the region’s economy. Leading economic indicators, such as purchasing managers’ indexes and consumer confidence surveys, appear to have turned the corner, suggesting the worst could be behind us. China’s abrupt reopening is also very good news for Europe, as the country’s economic recovery will lift demand for exports. After Asia ex-Japan, Europe is the region most exposed to China.
These developments mean that the worst-case scenarios have not materialised for Europe, but they also mean that the region’s prospects are brighter. However, we shouldn’t expect a swift, sharp recovery given the ECB’s plans for monetary tightening and the delayed effects this will have on economic growth.
For those who, like us, believe in mean reversion, European equities still harbour upside potential. Valuations are attractive in absolute terms (stocks are trading at a 20% discount relative to the 25-year average) and in relative terms. But investor pessimism hasn’t evaporated entirely. Fund outflows amounted to EUR 100 billion in 2022, and the figures for the past five years are no better – substantial outflows were recorded in three more of those years, and only one (2021) saw inflows. We are still bullish on the banking sector, since it is one of the few that stands to gain from higher interest rates. Companies with substantial exposure to China are also worth looking at, since they had previously underperformed as a result of Beijing’s zero-COVID policy and will be lifted by the country’s reopening.
Bonds – solid outlook for 2023
In 2022, inflation hit forty-year highs across developed countries. This can of course be attributed to the global disruption caused by the COVID-19 pandemic and the war in Ukraine. But peak inflation is now behind us. The slowdown in price appreciation clearly started in the US and is now gaining traction in Europe, thanks to the sharp drop in the cost of energy products. Natural gas prices, for example, are almost five times lower than they were at the start of the summer, and prices have declined for other commodities too. As supply chain bottlenecks have eased, maritime transport costs have returned to normal levels as well.
2023 could well be the year of disinflation, which should prompt major central banks to wind down the aggressive round of monetary tightening they initiated in spring 2022. That has improved the prospects for bonds, which last year posted their worst performance in recent memory, with declines reaching double digits more often than not. As the new year gets under way, all segments of the fixed income market are attractively valued, with yields sitting at the high end of the range seen in recent decades.
The outlook therefore looks bright for fixed income. After expanding our holdings in US and Swiss bonds and increasing their duration in the second half of 2022, we now plan to up our exposure to eurozone debt (investment grade, especially) in order to tap into the recent rise in yields on euro-denominated paper.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
