Gong xi fa cai! The entire team at Kristal.AI wishes you a happy and prosperous lunar new year!
We have entered the year of the water rabbit. The characteristics of a rabbit are longevity, peace and prosperity and 2023 is predicted to be a year of hope.And hope is what we need, as the war in Ukraine is reaching its one year anniversary and major economies are heading towards a recession.
Hope alone is not a good driver for investment decisions. Thorough analysis is always needed, now more than ever. I believe that we have seen in 2022 a major paradigm change in the investment behaviour, and what worked well the past 40 years will remain challenged and under pressure in the next few years ahead. After decades of falling rates, low inflation and unlimited liquidity most of us have for the first time been confronted with tighter liquidity and a more than ever important focus on asset allocation. Passive investing has been severely challenged, after the traditional 60/40 portfolio delivered one of its worst returns in history. The return of geopolitical risk on top of the usual market drivers will require a more active approach to sector selection and portfolio weights and adds another dimension of uncertainty into the decision making process.
In challenging times like these, me and the investment advisory team at Kristal.AI are here for your needs. We are looking to provide you with the best products to help you navigate these challenging times. For me, 2023 is not only a year of hope. It is a year of opportunity. Opportunities will arise at multiple times and in various forms and shapes throughout the year. Lets grasp them together.
With best wishes & happy investing,
Global equity markets enjoyed a strong start to the year thanks to lower inflation numbers in the US, hopes for a re-opening of the Chinese economy after an end to the zero-COVID policy and cheap valuations in Europe. Most indices have reached now a critical level, where a continuation of the positive momentum could signal an early end to the recent bear market. This is countered by lacklustre earnings so far. The first week of Q4 2022 results show a drop of -4.6% in EPS, the first YoY drop since Q3 2020. The 12month forward P/E ratio of the S&P500 stands at 17 right now, which is also hardly in the bargain department, especially since we are looking at a high probability of a recession in 2023.
At our IC meeting we discussed the high probability of a below average return in the 0-5% range for the whole year of 2023. But it is the path to get there, that will matter. We expect a volatile year ahead, where we could see the occasional periods of 10+% declines or rallies, followed by strong recoveries or corrections. In the end, we might just end up at similar levels as of today.
The annual world economic forum in Davos ended with mixed feelings. This year’s theme was ‘Cooperation in a fragmented world’.
Central bankers unsurprisingly kept tapping the brakes by voicing careful determination to continue their fight against inflation, while the majority of corporate leaders were careful to not succumb to the general gloom & doom sentiment, and instead tried to leave a cautiously optimistic note behind. Most business leaders were upbeat about the global economy. From sovereign officials Chinese Vice Premier Liu He seemed the most optimistic, when he stated that ‘China is open for business’ and expects growth to return to “near trend” in 2023.
Our IC views towards Chinese equities are moderately positive in the near term, where we see the current momentum after almost 3 years of lockdown, property market implosion and slow growth could extend for a little while longer. Looking at the very long cycles however, weakening demographics and the workout of an immense property bubble will provide strong headwinds in the long run.
The weaker USD and hints of a Fed pause sometime soon, helped Gold to rally above the important 1,900 resistance. But the real action has been in copper. After a sluggish 3rd and 4th quarter performance due to recession fears, the price of copper has rallied close to 15% in the matter of 3 weeks on the back of expected demand surge from the China re-opening. Long term there is also a case for a multi-year bull market ahead of us, since energy transition will drive a gigantic surge in demand in the long run. Some estimates are predicting a doubling in copper demand to 50mln metric tons by 2035 (Source: S&P Global). The capacity to facilitate and satisfy such demand surge will be scarce. While the current price levels might seem elevated, depending on one’s view of global growth, a cooling off to lower levels could provide interesting opportunities in mining stocks or copper related ETFs.
January 7, 2023
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