Market Update – January 2023

Following the challenging year that was 2022, where investors struggled to see portfolio gains, 2023 has thankfully begun on a more positive note. Equity markets are higher, bond yields are lower and credit spreads have tightened.  One could be forgiven for seeing this as a direct reaction to the market turbulence of 2022, but thankfully there are also some more fundamental grounds for the recovery in sentiment.

The initial strength in financial markets so far this year does not mean that investors should veer away from maintaining a somewhat cautious approach to growth, however, there are opportunities and improvements for those wishing to invest. There is now perhaps less need to fear some of the unexpected surprises like we endured in 2022 and significant optimism on the horizon.

With the greater confidence that the worst of the storm is now behind us, the possibility of a more drawn-out slowdown, which could provide some unwanted surprises, is still a factor to be considered. So, retaining patience with your portfolio is important, as short-term doubts still remain.  This is a direct result of the economic pains born out of a fight against inflation, whereas the previous two ‘big drops’ in risk assets were a result of deflationary shocks, namely the financial crisis and the Covid pandemic.

Much of the improved sentiment has been due to the abrupt ending of China’s zero-Covid policy, which not only reintroduces a large element of demand into the global economy, but also improves the outlook for supply. Coupled with this, we have the reduced likelihood of a severe recession in Europe, and the UK narrowly avoided a recession in 2022 – a more optimistic result than widely predicted. This is partially due to unseasonably warm weather, which has reduced the demand for gas, meaning energy prices have been forced lower and resulted in storage facilities being unusually well stocked. Positive consumer response to reducing consumption and government interventions have also created alternative sources of supply.

There is a general acknowledgement that peak annual inflation may now have passed for most countries.  The collapse in oil and natural gas prices has provided a strong helping hand, but aggregate prices are still a lot higher than they were, and wages have yet to catch up.  With inflation still far above the 2% target level, activity is going to have to slow further to elicit a central bank response, but the seeds of a longer-term recovery are currently being sown and will ultimately set up the new bull market at some point in the future.

If you would like to look into opportunities for investing at the moment, please do not hesitate to get in touch with an Integrity365 Independent Financial Adviser.