Q2 Quarterly Investment Letter - July 2023
EXECUTIVE SUMMARY
- The global economy is holding up better than it was widely expected to in the first half of 2023, led by the US. This is despite turbulence in the banking sector, US debt ceiling uncertainty, a spluttering Chinese economic reopening and ongoing geopolitical instability.
- As we argued in our January letter, “…a soft landing, characterised by growth slowing but avoiding a ‘broad-based weakening’, is fairly likely, yet under-appreciated”. Having risen 14.2% this year so far, the global equity[1] market appears to agree, with earnings expectations better than expected in aggregate.
- Whilst we are alert to the evolution of macro-economic conditions, and how they can shift rapidly in response to supply or demand shocks, our central expectation remains that any cyclical downturn in the US is unlikely to be deep and probably no more than a technical recession in the coming year.
- Having gradually increased the duration profile of our multi-asset portfolios over the past year, we have allocated more capital to conventional government bonds this quarter to reflect improved total return prospects and key diversification benefits.
- Equities have delivered strong returns so far this year, but a large segment of the market is yet to re-emerge from last year’s woes. This offers compelling opportunities for patient investors with allocation across global industries.
- Profit margins suffered an inevitable decline last year as cost inflation accelerated. However with inflation pressures easing and economic growth still robust, the picture for the US corporate sector as a whole is more promising. Earnings expectations have improved, supporting the returns of the broad equity market at large.
- Several of our underlying equity strategies emphasise medium and smaller companies, and in addition to improved earnings expectations, they are priced at attractive valuations. Whilst smaller companies typically trade at a discount to larger peers, the c. 40% divergence is almost as extended as ever.
There are no shortage of risks to our outlook, whether economic or geopolitical, that could shake investors’ nerves and drive volatility higher. We remain vigilant to shifts in the macro-environment that could challenge the outlook we describe.
[1] Source: Bloomberg, MSCI All Country World Index, total return from 30th December 2022 to 30th June 2023.
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