By Guy Monson, Chief Market Strategist, Sarasin & Partners

After nearly a decade of super-easy money, a return to normality won’t be easy. Last year was anything but plain sailing for investors, with all major asset classes declining – the first time we have seen anything on this scale for the last 30 years.

However, whilst we are a long way from erasing 2022’s market losses, the decline in volatility in bonds and equities, and a retreat in the US dollar together suggest a more stable backdrop for 2023.

In some positive signs we are seeing US core consumer prices falling, which indicates that central bank policy is gaining traction. Elsewhere German and French inflation rates are also falling alongside sharp declines in oil and gas prices compared to the beginning of the Russia-Ukraine war. Whilst we may be past the peak of the great inflation shock, rising labour costs suggest that getting back to central bank target levels will not be easy.

Reasons to be cheerful

There are three factors that may help central banks contain global prices.

  1. Firstly, Europe’s gas reservoirs are now 28% fuller than they were a year ago. In fact, Europe may be able to secure much of next winter’s energy supplies with minimal inflows. And whilst gas prices are still three times higher than two years ago – six months ago they were nearly ten times.
  2. Secondly, global supply chains are returning to normal with the Federal Reserve Bank of New York’s global supply chain index close to its five-year average. For China the journey is just beginning, but the speed of reopening suggests the transformation in Chinese manufacturing output could be very significant.
  3. Finally, US and EU trade restrictions forced China to focus on intra-Asian trade with ten of its neighbours now showing staggering growth of 71% since US tariffs were applied in 2018. This surge in Asian trade will only accelerate as China reopens.

Is it too soon to sound the all-clear?

As we enter 2023 there is some light at the end of the tunnel. Global markets are full of long-term opportunity, equity valuations are close to fair value (but not yet cheap), and corporate bond yields offer returns well above two-year inflation forecasts. (Source: Bloomberg, Dec 2022). However, patience will be required before Central bankers sound the all clear.

Investors have a delicate balancing act to face in 2023, navigating between the global recession and the potential for renewed inflation on the other side. There is also the possible escalation in the Ukraine conflict and the challenges surrounding the reopening of the Chinese economy to consider. Against this backdrop, it will take strong nerves, stamina and the ability to act quickly when opportunities arise.

Most importantly, investors should keep a clear eye on the longer-term goal. That of the growth in equities, at the right price. Whether it’s renewing the worlds energy and transport infrastructure, automating factories and farms, or capturing a new wave of emerging market growth – we believe it’s an extraordinary time to accumulate long-term thematic exposure.

At Sarasin & Partners, we have been running model portfolios since 2013 which benefit from our distinct global thematic investment process. The core range of portfolios are risk rated by Dynamic Planner and have been awarded Dynamic Planner ‘Premium’ fund status, demonstrating the high, risk-adjusted returns generated over the last five years.

Important information

This article is for investment professionals only and should not be relied upon by private investors.

This article has been issued by Sarasin & Partners LLP which is a limited liability partnership registered in England and Wales with registered number OC329859 and is authorised and regulated by the UK Financial Conduct Authority. It has been prepared solely for information purposes and is not a solicitation, or an offer to buy or sell any security. The information on which the document is based has been obtained from sources that we believe to be reliable, and in good faith, but we have not independently verified such information and we make no representation or warranty, express or implied, as to their accuracy. All expressions of opinion are subject to change without notice.

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