Q1 Quarterly Investment Letter - March 2023
"It’s close to impossible to apply brakes to the economy without breaking something."
Niall Ferguson, Bloomberg, 19 March 2023
EXECUTIVE SUMMARY
- Aggressive monetary policy tightening in the past year has exposed the fragility of a small number of US regional banks and raised concerns around financial sector contagion
- Whilst Credit Suisse has long been beleaguered for unrelated reasons, it too became the focus of investor fear resulting in Swiss National Bank support and a takeover by rival UBS within less than one week
- Action by the US authorities has been swift, covering uninsured deposits and providing a liquidity backstop where necessary, preventing a collapse in confidence that characterised the Global Financial Crisis of 2008
- These events are likely to weigh on US economic growth, restraining lending activity by small-medium sized banks and curtailing consumers’ propensity to spend, however this comes with a silver lining – lower inflation and less pressure on the Federal Reserve to raise interest rates further
- In Europe and the UK, the situation is not dissimilar; growth momentum has been building, underpinning inflation ‘stickiness’, but tighter credit conditions should mean an earlier end to rate hikes than otherwise
- China’s rapid reopening from zero-covid policies has kick-started consumer activity, yet broader geopolitical and macro headwinds have weighed on emerging market returns – we remain cautious towards the region
- Renewed questions of financial stability have not derailed our investment outlook, which is characterised by a period of slowing growth and falling inflation as opposed to outright recession, but do imply heightened volatility in equity and bond markets as the situation unfolds
- The big picture supports selective engagement with risk assets, differentiating from the broad market to capture valuation and earnings growth disparities. We are pursuing this through a range of high quality active managers, and leaning into specific themes, namely healthcare, value and smaller companies. The outcome is a well balanced portfolio of investment ideas which we retain high conviction in for the long term.
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