MARKETS IN A NUTSHELL - JANUARY 2023
On 22 January, Foord Singapore ushered in Chinese New Year as the Year of the Tiger gave way to the Year of the Rabbit. Traditionally, the tiger embodies courage, strength and resilience — as it turned out, all qualities investors needed in abundance to survive the turbulent markets of 2022. In contrast, the rabbit is a symbol of longevity, peace and prosperity.
Investors wasted no time positioning for a better outcome this year: developed and emerging markets both rallied to post high single-digit US dollar returns in January. Better-than-expected economic data out of the US and Europe, and China’s economy reopening much faster than anticipated, triggered the rally.
Bond investors were also uncharacteristically optimistic. Despite the world’s leading central banks being poised to raise rates to their highest levels since the financial crisis, bond prices rebounded rapidly after last year’s historic sell-off — with yields falling across the curve in most developed markets. This had a knock-on effect on emerging markets, with yields moving down in tandem with US Treasuries.
Most currencies strengthened against the US dollar in January, with the US Federal Reserve no longer being in the driver’s seat as it nears the peak of its rate hiking cycle. With China re-opening, sentiment towards emerging markets is again positive, with foreign flows into emerging markets surging to near-record highs.
The risk now is that markets are pricing in too broad a recovery, and that the gap between investor expectations and economic reality is too wide. There is still a strong probability that global inflation levels will remain at higher levels than the market is expecting, and that 2023 earnings estimates for many sectors are still too optimistic. If inflation falls more slowly than expected and growth continues to be resilient, central banks should keep interest rates higher than the market is expecting. This will be a headwind to global equity markets and so caution and a very selective approach are still warranted.
With global equity markets down substantially in 2022, valuations have improved. The managers of the flagship US dollar Foord International Fund increased the equity exposure from 53% to 66% in December and the fund benefited from the higher equity exposure in January. It and the Foord Global Equity Fund were buoyed by sustained good news from their selective Chinese investments that favour the growth of the rising Asian middle class.
Given where we are in the cycle, the potential range of outcomes for the markets is wide — with many scenarios that might unfold for investors from this point. What is important to note is that Foord’s funds are not dependent on any one scenario playing out to perform well. Our funds are positioned to withstand a wide array of risks and are invested in a wide variety of opportunities that will perform well for different reasons.
We wish readers the best for 2023 and for the Year of the Rabbit.
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