This a shorter update as there is not much to report from the past two weeks. Market narratives remain the same.

At one extreme, we have the “soft landing” advocates, those who believe that the Federal Reserve (Fed) has done enough to curb inflation and will soon be able to cut interest rates, allowing the US economy to avoid recession. The other contrarian believes that the Fed will continue to raise interest rates and indeed may have already raised them too far, suggesting that recession is now inevitable. Where one sits on that spectrum of expectation determines how one’s portfolio should be positioned.

For us, at the risk of repeating myself, a recession is likely, but the timing is uncertain because of the strong US labour market which is still sitting on a great deal of pandemic savings. But that does not mean we are changing your portfolio strategy. In a market seemingly obsessed with a binary outcome (recession/no recession), we believe that the future path is likely to be more nuanced.

Portfolio positioning

As regular readers will know, we are great believers in the power of portfolio diversification over the long term. Granted, diversification did not work in 2022 due to the drastic regime change and shock to financial markets caused by high inflation and higher interest rates. Nonetheless, the empirical evidence that diversification works over the long term is clear and we recognise that investing (as opposed to speculation) is for the long term. In fact, the longer one stays invested, the more likely it is one makes money.

Bearing this in mind, we are “sticking to our knitting” and ensuring that client portfolios are well spread across asset classes, geography, size of company, industry and style. Given that the near-term outlook is very uncertain, we firmly believe that this is the right thing to do.

All eyes on the data

For now, all eyes are on the US earnings season, which kicked off in earnest last night with Microsoft being the first of the mega-cap technology companies to announce results. The bar set by analysts was quite low, given employee lay-offs and the difficult-to-call economic outlook, and Microsoft narrowly beat expectations on most earnings metrics. However, margins were lower than forecast. Whilst the Q4 earnings season is still young, results so far have underwhelmed the market and company messaging is increasingly acknowledging the heightened macroeconomic uncertainty and risk of softer consumer demand.

Elsewhere, US manufacturing purchasing manager indices (PMIs) which are seen to be a leading indicator of economic health came in narrowly higher than expectations at 46.6 versus a forecast of 46.3. However, this is well below 50, which is generally accepted to be an indicator of an oncoming recession. Services PMIs also beat expectations, coming at 46.6 versus 45.3 but, again, well below 50.

As I have said before, during times of uncertainty, we don’t think it wise to take large “bets” in portfolios. Investors, in our opinion, would do well to sit on their hands and see how the next six months play out.

Until next time stay well.

Important information

Past performance is not a guide to future performance and may not be repeated. Investment involves risk.

The value of investments and the income from them may go down as well as up and investors may not get back any of the amounts originally invested. Because of this, an investor is not certain to make a profit on an investment and may lose money. Exchange rate changes may cause the value of overseas investments to rise or fall.

This communication/presentation is for information purposes only. Nothing in this communication constitutes financial, professional, or investment advice or a personal recommendation. This communication should not be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the document. Any opinions expressed in this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or companies within the same group as Avellemy as a result of using different assumptions and criteria.

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