27 Mar Asset Management (MNAM) Investment Insights – March 2023
“Your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed.”
– Peter Lynch
Welcome to the inaugural Insights bulletin – a quarterly read with a glimpse into the state of world markets and a closer look into our model portfolios.
World share markets continued to be volatile over the first quarter of 2023. Our portfolios have tracked slightly below our stated benchmarks in Q1 2023, but at a considerably lower risk premium resulting a more defensively positioned asset allocation in the face of an increasing likelihood of global recession.
Through January 2023, share markets ran in valuation terms on the back of most central banks globally not meeting through this period to review interest rate positions, leaving interest rates unchanged amongst an environment of reduced speculation and media coverage. The other significant event through January 2023 was the re-emergence of China, having removed its zero covid stance in late 2022 and economically re-opening. Amongst the backdrop of rising political tension between US and China around Taiwan, sharemarkets surprisingly ran on this re-emergence. The advice taken by our investment committee with the increased political tensions between the US and China was to remain underweight China meaning we took the more conservative approach through this period.
Ultimately, January gains were all but given up in the months of February and March, with persistent inflation and the continual raising of interest rates, with markets effectively recognised as having been overbought in January on sentiment more so than investment fundamentals. Significantly, March as global rates continued to rise, saw the US banking system under the microscope with contagion fears spreading of a banking system collapse following the demise of Silicon Valley Bank and later the historic event of the Swiss Government assisting in the UBS bail out of Credit Suisse.
Over the quarter, we added physical gold and gold equities into our portfolio, as a combination of a bearish economic outlook and falling bond yields shored up demand for gold assets. This was a successful move for our portfolios, with physical gold and gold equities returning strongly respectively for the quarter. Additionally, we increased our long-duration bond holdings, as investors wagered that the Federal Reserve and RBA will not raise interest rates as high as previously forecasted due to the prevailing banking crisis. This, too, turned out to be a valuable shift in our portfolios, as a fall in yields meant our international fixed income funds recorded solid gains for the quarter. We also increased our alternative asset allocation class given their success in de-risking our portfolios. We continue to hold an overweight position in the alternatives asset class and underweight long growth equities, as the Investment Committee believes that it will provide ongoing benefits as we navigate through choppy market conditions moving into Q2 and Q3 in 2023.
A continuing 2023 theme is the moving of monies away from traditional growth assets into cash-like funds, as the Bank of America (BofA) chart below shows. Most poignantly, cash-like funds are now held at a higher level than through the 2020 Covid pandemic, so it is reasonable to suggest cash-like reserves are being stockpiled ready for future deployment, a good statement of where markets currently sit.
Looking to Q2 2023 to June we expect a continuation of the ‘bear market type grind down’, and therefore, advocate a continued conservative approach. For Q2 2023, our attention will turn to company earnings around the globe. Until now, the decline in company earnings arising from inflation and interest rate hikes has been steady and gradual. This rate rising cycle is near the 12-month mark, and history shows the full effects of raising rates typically has a 12 to 18 month lag from inception. Recent signs of falling inflation figures, particularly in goods and services, is broadly seen as a positive and even a likely catalyst to pause/even reduce future interest rate movements. However, we recommend caution, as coming off the most aggressive rate rising cycle since the 1970s, there is a justifiable view that falling inflation is reflective of falling demand and tighter financial conditions, and with this 12 to 18 month lag effect, lead to a more sudden drop than expected as the chart below suggests.
The Investment Committee believes that the rising interest rate cycle is nearing its peak and tightening monetary policy is now taking full effect. We expect the rising rate cycle to be replaced with tightening credit conditions from banks. Whilst US headline inflation steadily declined and the monthly CPI fell in Australia, the wage-fuelled services inflation has remained persistent due to the tightness in labour markets, underpinned by a historical low unemployment rate of 3.5% in both economies. There is good historical precedent to think we may be getting to the ‘break things’ part of the cycle as shown below.
In conclusion, our focus remains capital protection in the near term and the de-risking of the portfolios. Our Investment Committee remains convicted that this approach to look to track benchmark returns over the longer term at a lower risk profile (which we began in mid-2022) should provide outperformance over the rest of the 2023 year.
For your reference, below is a table showing the World Indices as at 31 March 2023:
If you have any further questions, please do not hesitate to contact our office on 02 9899 6077 or email MNAM@matrixnorwest.com.au