EDURAN NAVIGATOR

Quarterly Market Review with an Outlook.

Zurich, 3rd January 2023

“Recession”. The markets are anticipating a potential change in interest rate policy. Following a market correction over the first three quarters, the fourth quarter saw a turnaround and a strong price rally kicked in. Although the overall situation is still very messy, with the aftermath of the Covid crisis forcing supply chains to reconfigure as well as the Ukraine war, which has resulted in the BRIC states distancing themselves from the USA, the markets appear for the time being to welcome the slight easing in inflation. However, the factors mentioned above conceal some additional inflationary potential. In addition, the declining disposable income available for consumer spending has raised the specter of a general economic downturn.

Market Review

The markets were able to improve on some fronts during this fourth quarter, thanks to an outlook that does not anticipate any further surges in inflation and is thus anticipating a potential end to the cycle of interest rate hikes. In particular Eurozone markets were able to make up some lost ground following previous price drops coupled with currency-fueled overselling.

Gold and other precious metals also rose in value, edging close to previous highs. A counter-reaction to the strong US dollar set in on the currency markets, bringing the euro back above parity and halting the yen’s persistent downward momentum that had been ongoing for several months, and triggered a rebound that – at least for now – has been no less dynamic.

In terms of sectors, it was once again the energy sector that posted the strongest growth. The technology sector was marked by resurgent confidence in stocks that had suffered a strong correction over the previous >12 months, and that have recently hit the headlines with cost-cutting measures.

In Focus

Whereas the outlook during the summer and until as late as the start of the fourth quarter was bleaker, a sea change occurred with October’s inflation figures. An oversold market surged back into positive territory. Inflation is still a major focus of debate: central banks are relentlessly battling inflation, although the market by contrast seems to believe that their rhetoric will not necessarily be followed up by action, especially if the economy slumps on the back of the robust interest rate hikes. It seems plausible that inflation figures have already peaked. Supply chains have reorganized and supply chain bottlenecks are being ironed out. However, many goods have become more expensive as a key consideration is not only price but also security. Further uncertainty is being caused by the war in Ukraine, specifically over how persistent the divide between east and west or between the USA along with its closest allies and the BRICS countries will be. Are we sliding into a new bipolar world order, or will everything eventually fall back into line? In our view the market appears to be rather noncommittal on this score, and has given too little weight to the risks of a recession or some other crisis.

There are already tangible indications during this quarter that, behind the headlines, not everything is as rosy as might have appeared. Consider for instance the US labor market, where unemployment figures have fallen back to previous lows last seen before the Covid crisis, which in turn represented the lowest level since the start of the 1970s. However, it must be borne in mind that a worker doing three jobs because a single job does not pay enough also contributes to this positive statistic. Alternatively, where costs increase for employers, this does not necessarily – or demonstrably – mean that workers have more money in their pockets. Here too, labor market participation is still significantly lower than pre-Covid levels, and still falls massively short of the numbers achieved before the 2008/09 financial crisis. The ice on which we are walking has not become any thicker.

With declining property sales/transactions the US housing market, which accounts for a not insignificant share of economic output, is also running out of steam.

Outlook

The recovery should continue for a little longer as inflation figures come down further from the high levels they initially shot up to. The crucial question may be whether inflation was only a flash in the pan or will remain with us in future in some form. Although lockdown-related distortions were initially regarded as the core reason for rising prices, politicians then became involved, cutting checks and doling out support left, right and center. Recently, wage negotiations have also been a talking point, such as for instance the 2% salary increase in 2023 for federal officials in Bern.

Pundits’ opinions cover a broad range of possibilities, and prevailing views are largely dependent on the particular situation in the relevant market niche. One scenario could be stagflation, with interest rates slightly behind inflation, perhaps according to a dynamic similar to the aftermath of the Second World War. On this view, due to the massive debt mountains, governments might no longer be able to afford high interest rates, thereby re-establishing scope for action. It will be savers who foot the bill. As a result, stock markets will be sitting pretty over the medium term, enabling value to be maintained – at the cost of higher prices (in future it will become more expensive to secure the same returns). However, until then the situation may remain volatile. We are favoring shares, focusing within this spectrum in particular on the soundest possible stocks featuring both cash flows as well as promising business models.

“Knowledge kills action; action requires the veils of illusion.”  Freidrich Nietzsche

EDURAN AG

Thomas Dubach