McLaren Portfolios
December returns were mixed but overall, the marketplace felt it was having a bear rally towards year end. As fund managers wound up for the year end and contemplated the prospects for 2023 many now have the outlook that the second half of the year will be much more settled once inflation is calmed, and positive gains will be possible across most sectors.
The key highlights for McLaren portfolios were,
The McLaren portfolios all made a strong recovery over the last six months
The positioning in healthcare equity continued to deliver positive returns
Asian and European equity assets in general saw some rebound
Short-dated bond funds avoided most of the sell-off seen in the bond market and look well-placed to have a good year ahead
Infrastructure assets which were affected by the big sell-off in Gilt markets but partially recovered some of the losses made
Whilst it has been a challenge to make and keep any gains for investors in 2022 it has been reassuring that the strategy and diversification has continued to dampen the worst of the market sell-off.
Global Financial News
Developed markets had another mixed month reacting to political and economic news flow.
The market anticipated a slowdown in the rate of interest rates hikes from the US Federal Reserve as data started to point more to a pull back of inflation and an increasing concern of recession hitting the US economy in 2023 pervaded. The US Dollar weakened slightly on the news as well after having a period of strengthening. Capital markets started to factor in a lower peak in Fed rates and bonds priced higher as a result.
The continued war in Ukraine and the pressure on commodities continued however a milder winter in Europe, so far, together with more constrained demand from China, has seen oil prices fall back from $100 to $80 per barrel. Continued high levels of European gas storage aided by increased global production volume, has eased fears of a deep recession, however the doubling down of Russia’s military offensive meant that a resolution to the war felt less likely.
European markets were much less certain despite the huge inroads in securing gas supply, the build out of LNG (Liquified Natural Gas) infrastructure, and EU cohesion, as this was offset by slowing economic activity, labour shortages and inflationary pressures starting to factor into consumer activity. The logjam of up to 51 LNG container ships awaiting to unload was not sufficient to ease the financial pain of consumers being hit by higher food and fuel prices.
Domestic News
A change in the UK Prime Minister, the third this year helped to calm market nervousness and the FTSE100 rebounded to make a small gain over the month. However, the damage was done especially in the Gilt market which sold off aggressively and caused a chain reaction of selling from pension funds caught up in hedging losses. Aside of the bond market the focus continued with the cost of living and inflation, with may in the UK suffering economically from the fast rise in prices, especially housing costs, and a rising level of industrial action is adding to the sense of a repeat of the 1978/9 Winter of Discontent.
Looking Forward – Where to for 2023
Our views of 2023 are that the dilemma of inflation versus recession will continue, and the likelihood of avoiding a global recession is shrinking by the day. Having put up rates aggressively in 2022 the US Fed and other central banks may well be faced with prospect of dropping rates swiftly in 2023.
Inflation is less likely to fall back to pre-Covid levels, with higher energy, mortgage, and commodity prices and the re-setting of labour costs keeping inflation higher. However, the advent of spring and the slow recovery of China, will likely see a falling of gas prices and a further pull back in inflation.
The race to secure non-Russian energy supplies will be a major issue around the world and investors can expect to see wider use of LNG and inevitably coal for a few more years until renewables and efficiency can be ramped up further. The race is on to build more alternative energy generation, distribution, and storage globally as the impact of the war in Ukraine has spread to all areas around the globe. We expect to see greater opportunities for energy related investments as governments strive to avoid another expensive winter, and to have more resilient networks.
Unlike western economies many parts of the world are still struggling to get out of the impacts of Covid, notably China with its zero-tolerance policy and poor vaccination levels, however this looks likely to be phased out by next summer and should mean that economic activity should ramp up again. A better functioning China should mean that on aggregate there is a higher level of global economic activity. Chinese shares, which are already at low valuations could well see a recovery and drive the region higher.
Outside US large company growth and Indian equity markets share valuations look cheap and whilst may take another step down, the medium-term outlook for strong companies looks benign. If employment can remain high and financial institutions are prepared then it could be a mild downturn, but the risks of an over-reaction remain, especially if the housing and construction sectors are badly disrupted. This looks to be a good market for good fund managers who can invest into strong companies with resilient revenues. Resilient businesses will be as important as strong macro themes such as healthcare which we continue to like. The backlog and added work due to Covid will take many years to overcome, which with the aging of populations and the increasing demand for healthcare will mean this sector has a good tailwind behind it.
And finally,
There was no ‘pigs in blanket’ shortage this festive season, further proof that supply chains are healing.
