Good reasons to be optimistic in 2023
Abraham George Market Musings
This is my first market report for the New Year. 2022 in many ways was tough for all of us. To be frank all asset classes posted negative returns last year and by that, I mean large and small companies, growth and value stocks, international and emerging markets, and even most fixed-income sectors.
How are things stacking up for 2023? I think we need to be optimistic and there are good reasons to be. Firstly inflation is coming down. Remember the wrong perception of inflation and the Fed not being proactive and getting very reactive and panicky about it was the single most cause of excessive volatility last year. I surely believe the big interest rate hikes are behind us. Though authentic reports on the war situation are sketchy looks like Russia is losing its war against Ukraine. The supply chains are no doubt normalizing and even the global chip shortage is turning into a surplus. US unemployment is at near record low levels and the economy is not that weak. Third quarter GDP was recently revised upward to 3.2% and no doubt stock valuations are much lower than they were a year ago.
I mostly look at the S&P 500 to determine overall market strength. Technically the level to close was above the 4050 level. It did break the level a few times but finally fell back. We are again languishing close to the big downward sloping trend line that represented the bear market of last year.
To start the year, three of the four big US banks beat earnings estimates. But all set aside more reserves for potential loan losses to the tune of a total of $ 2.25 bio. This only adds more to the war chest they accumulated during the worst of the pandemic period. Therefore bank balance sheets are strong.
No doubt there are uncertainties in the markets and the recent rise in gold prices displays that. Remember we called a bottom in gold prices from the lower 1600 handle. Central banks all over the world have been increasing their gold holdings and this may have more to do with the new world order that we may be moving into with the adoption of CBDCs and new reserve management. More on that later. It could be also a sign that the unsustainable global sovereign debt bubble will be pricked at some point.
It may all start with Japan. Japan has been fighting deflation for the last 30 years or so. For all these years they have printed Yen and inflated debt with no real consequences.
All of a sudden inflation is running at a four-decade high and the BOJ is vulnerable to losing control of the Japanese government bond market (JGBs). The BOJ has been intervening daily to contain the yield on 10-year JGBs to 50 basis points. Remember they moved that from 25 to 50 in the latter part of last year. Despite all this, there are reasons to be optimistic about stocks. The strategy may not be to invest in the index but to be stock specific.
The pandemic no doubt has brought significant changes in the way we do business, and spend time with friends, families, and leisure. Clearly, the advancement in technology has aided us to adopt this new lifestyle. The pandemic has now made us more mobile than before.
Before COVID there was work time and leisure time, with separate spaces for each. The distinctions between those were crystal clear but now what we have is only a Chinese wall.
In most cases, a physical office has become redundant. You do business on the go and meet people in different cities. I think travel, hotel, and leisure are going to do extremely well this year if we are not struck with any major disruptions again.
The emergence of technologies like Zoom, Google meet and Microsoft Teams has particularly helped the ‘knowledge workers’ combine work and leisure in new and different ways.
Increasingly flexible and hybrid work styles coupled with enabling technologies have clearly moved us into a new work environment.
Many corporations and companies are also supportive and embracing this new lifestyle to be a digital nomad. Many recent studies have shown that many firms have adopted a ‘remote first’ policy while maintaining lesser physical offices. Others have taken up a remote-only model, freeing employees to work from any global destination with a reliable internet connection.
While political stand-offs are forcing all countries to be self-sufficient these COVID-inspired mobility trends are game changers and are here to stay. So look for investments that will capture these new trends.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office, and a hedge fund.