The Nutmeg Smart Alpha portfolios, powered by J.P. Morgan Asset Management, combine our core investment principles with the in-house multi-asset capabilities of one of the world’s leading investment houses. Fresh into 2023, we invited Hugh Gimber, a global market strategist from the market insights team at J.P. Morgan Asset Management, to answer some key questions as to the team’s outlook for the 12 months ahead.
2022 was defined by rising inflation, but might price rises peak in 2023?
In short, yes, we expect inflation to moderate over the course of 2023. But, I think there will be some differences depending on where you’re looking. In the US, we believe that inflation has already peaked.
Price pressures have been gradually easing now for several months and we expect continued improvement in 2023 as growth slows.
In Europe, the sources of inflation are slightly different. Surging energy prices are having much more of an impact here.
Inflation is therefore likely to come down more slowly than in the US, but we do expect to see improvement, both in the UK and on the continent.
Are we set for a global recession in 2023 and, if so, how severe could this be?
Unfortunately, yes, it looks like it will be difficult for the global economy to dodge a recession over the next 12 months, and we may in fact already be in recession in the UK.
I do think, however, the second part of the question is much more important. Rather than viewing recessionary risks as something of a binary issue like a simple on or off switch, we’re spending a lot of time thinking more about the nature of the slowdown that investors will be facing.
Thankfully, we think that the risks of a deep downturn, something akin to the financial crisis in 2008, are actually relatively low. The worst recessions generally follow a period of excess, balance sheets get stretched, consumers or businesses take on much too much leverage, and then the resulting correction is much more painful.
This time round, there hasn’t really been enough of a boom for us to get very worried about a big bust. It certainly was a painful year.
2022 proved to be a tough year for bond markets. Is the outlook any brighter for the year ahead?
On many metrics, 2022 was the worst year ever for bond markets on record. When you consider the role of bonds in a portfolio, particularly government bonds, they’re really there to serve two purposes. Firstly, to provide income. And secondly, to provide diversification against riskier assets.
Now, the problem in recent times was that bonds couldn’t really offer either of these characteristics. At one stage, a staggering 90% of the global government bond universe was offering income of less than 1%. And we’ve seen more recently how bonds have been struggling to diversify against equities.
Crucially, while the correction in bond markets has been very painful, we believe that it is now nearing completion. Valuations have become much more attractive and the ability for investors to build well-balanced portfolios, using both stocks and bonds together, is now arguably the strongest in over a decade.
Can you explain to us the difference between ‘growth’ and ‘value’ in terms of equities? Which has the best prospects for 2023?
Growth investors are generally trying to pick companies whose earnings are expected to grow faster than the rest of the market, and they’re often willing to pay a premium for this earnings growth. Perhaps the big US tech companies are a classic example here.
Value investors are hunting for companies that have perhaps been overlooked by others. They’re typically cheaper than the rest of the market, and the hope is that over time, their share prices will rise when other investors realise the company’s true value.
Banks or energy companies are examples that are often found in this bucket. Now, in our view, the prospect for value stocks are probably still slightly better than growth stocks over the coming months.
Now, by definition, growth stocks are more expensive than value stocks. But the problem today is that the gap in valuations between the two categories looks even wider than it would do normally.
Now, partly this is still an overhang from the boom in growth stocks that we saw during the pandemic.
Thinking then about earnings, the earnings of value sectors we think could also be more resilient than growth sectors ahead. The recent earnings season showed how some of the big growth names are really struggling now to keep up with investor expectations, and we fear there could be a little bit more disappointment ahead.
Covid lockdowns in China have had a big impact on this economy, so how do you see the outlook for Chinese equities and emerging markets as a whole in the year ahead?
It’s difficult to separate a view on the emerging markets from a view on China, given the country’s large weight in emerging market benchmarks. The zero-Covid policy has had a huge impact on Chinese stocks and on investor sentiment overall towards China over the past year.
Investors started 2022 too optimistic on the pace of reopening and were therefore regularly disappointed. The good news looking forward is that policy in China is now starting to turn.
The path out of zero-Covid will still be bumpy, but the administration is sending an increasing number of signals that they’re starting to focus on protecting livelihoods as well as just lives.
As a result, we think that there are still some strong opportunities to be found in the emerging markets. The key with investing in these regions is to do it with the right time horizon. They are more volatile than developed economies, and so investors need to be thinking in terms of years rather than just in terms of months.
Sustainability, or socially responsible investing, remains a hugely relevant long-term theme for many investors – what might be key talking points in 2023 and beyond?
The strong performance of traditional energy companies in 2022, which was linked to the spike in commodity prices following Russia’s invasion of Ukraine, has been really frustrating for many investors with a sustainable tilt to their portfolios.
Now, this is especially true for those strategies that were excluding sectors that often scored badly on sustainable metrics, such as oil and gas. We think it would be a huge mistake, however, to read this as a sign that sustainability no longer matters. In fact, the opposite is true. We expect to see a major acceleration in renewable roll out over the coming years as the world looks to reduce its dependency on Russian fossil fuels.
There are therefore going to be major policy tailwinds for those companies that can help to enable this change. In basic terms, the focus on sustainability is only moving in one direction. The environmental angle is clear, but social and governance factors are also receiving much more attention, creating risks to the long-term value in companies whose practices are not up to scratch.
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