Church House Joint Chief Investment Officer, James Mahon, reflects on an unpleasant year for investors.
After a grim year for investors with weakness across the spectrum of financial assets, the final quarter did bring some, modest, relief. It may be that we can look back on autumn 2022 as marking the low point for this cycle, let’s hope that does prove to be the case.
2022 was the year when central bank credibility was lost as they prevaricated and delayed too long before lifting interest rates, exacerbating the unfolding inflation problem. The US Federal Reserve woke up to its duty first and has been moving aggressively to restore its reputation. We are not done with the increases in base interest rates yet, more is likely in early 2023, but at least the end is probably now in view.
It does appear that we have seen the peak in inflation rates. Led by a turndown in America and recently followed by figures from France and Germany (encouraged by that fall in gas prices opposite), we expect UK inflation to follow suit shortly. The tricky question is whether the central banks, having been too slow to start, will move rates too high and/or hold them there too long, deepening the nascent recession(s).
As we have observed before, at present it is hard to envisage a deep recession as unemployment is so low on both sides of the Atlantic, while domestic and corporate finances are generally in good shape, as are bank balance sheets. But Jerome Powell, Governor of the US Federal Reserve, has openly said that he is prepared to “bring some pain” to households and businesses. Remember too that J Powell is retiring in 2026 and is more concerned with the Fed’s ‘inflation-busting’ reputation than politics.
The Bank of England feels like a bit of a follower, but we expect at least one more increase in the Base Rate after December’s move, 4% looks likely, possibly a shade higher. From the geo-political viewpoint, the war in Ukraine has all the hallmarks of a long drawn-out, and unpleasant conflict, we hope the Ukrainians can maintain their determination, and the West stays firm. As an aside, it is encouraging to note that the two major world dictators, Vladimir Putin and Xi Jinping, are looking somewhat hobbled: Putin by Ukraine and Xi Jinping by his own ludicrous COVID policies.
With the sharp falls in so many asset prices in 2022, there are now attractive opportunities to be found in many areas. Fixed-interest investments (notably those maturing over the next 5-10 years) are particularly attractive. Equities are more difficult as company earnings will fall with recession, but they have been ‘re-priced’ in dramatic fashion. Last year’s switch from quality to recovery/value was overdone and here there are plenty of opportunities. Overall, we expect to see a better year though,doubtless, there will be further hurdles to overcome on the way.
The full Quarterly Review is available here.
The contents of this article are for information purposes only and do not constitute advice or a personal recommendation. Investors are advised to seek professional advice before entering into any investment arrangements.
Please also note the value of investments and the income you get from them may fall as well as rise and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.