Dave Deruytter looks ahead to the new year and calls for cautious optimism.
It has been a dramatic year for the financial markets. Most news was bad with few bright spots. Data was particularly troubling on inflation, led by energy and food prices. Consequently, most indicators have been largely negative for financial markets.
There’s been a lot of negative news to swallow. Double-digit inflation in many countries, gas prices in particular running at alarmingly high levels. Business supply chains are still dealing with disruptions from Covid and have taken more time than anticipated to recover, particularly for microchips. Critical raw materials for batteries and IT equipment have been expensive and in short supply. Big Tech has been struggling, while crypto currencies and exchanges have seen deep dives, not assisted by a series of insolvencies from Luna to FTX. The geopolitical situation from Russia’s invasion of Ukraine to a further cooling of US/China relations have all added a certain chill. Still, it is always darkest before the dawn. When some of these problems are resolved or even stabilized, the outlook will improve.
Have we hit the bottom on the financial markets?
Nobody has a crystal ball, but more and more observers believe glimmers of light are appearing. Markets are likely to stay choppy for a while though, because of the structural inertia of some large institutional investors, such as pension funds, and the general feeling of caution making investors hesitant after such a tumultuous time. For those who have a greater appetite for risk, gradually investing in riskier assets in a downturn can prove beneficial in the longer term.
“Nobody has a crystal ball, but more and more observers believe glimmers of light are appearing”
One area worth traditional areas worth looking at will be the bond markets, there are already signs that inflation is stabilizing, if not yet on an obvious downward trajectory. While the U.S. Federal Reserve remains cautious, there are signs that inflation is going in the right direction, it is anticipated that the EU will have a similar response. Thought bonds are seen as a conservative investment option, there is always the fear that their value will erode with inflation. However, if you invest while interest rates are high and inflation is going down this becomes much more interesting as an investment.
We are already seeing clear signs that inflation is going down in the U.S. The EU should get there soon too, save for unexpected hiccups. After 2023, one can only hope that inflation and interest rates keep on decreasing to further build on the projected good year for bonds to come in 2023.
On the equity side, though shares typically benefit from lower interest rates too, there are other uncertainties that need to be tackled to reassure investors.
Trends to look out for include the “glocalization” drive. The pandemic and a more complicated geopolitical environment have caused governments and businesses to rethink and readjust their supply chains. Also, we could see some of the equity markets, for example, in the tech and possibly the cyber world rebound with a more favourable economic outlook.
One thing is very clear at this moment and that is that the crypto world needs to be thoroughly cleaned up if it wants to attract new investors. Until there are signs that this has been done, it would be advisable for any investor to proceed with caution.
In short, markets will only return to a comfortable and sustainable level once the economic conditions improve. However, looking at historical price earnings levels, many markets are cheap or neutral at current prices.
What about art and other investments? The upper end of the art scene does not seem to be hindered by the difficult economic and political situation. The new kids on the block like non-fungible tokens (NFT) thrived for a while, but are down a lot in the second half of this year – much like their blockchain fellow travellers. Like with any art, it is a question of hype and taste.
“Trends to look out for include the ‘glocalization’ drive”
In conclusion, bright spots are emerging in the financial markets. They are not moving fully in sync yet, some regular buying to build up riskier positions again may be worth considering, but always stay true to your investor profile and time horizon. Invest in what you understand, anything else is gambling. There’s nothing wrong with the occasional flutter, but it should be kept to your spare change.