A year ago, in our outlook for 2022, we saw the threat posed by inflation and recognised the risks from the many geopolitical tensions, especially those in Eastern Europe posed by President Putin. We certainly did not predict the invasion of Ukraine and a major war in Europe happening within three months! Which proves a point: when forecasting, nothing is cast in stone; unexpected googlies can still come whistling down the wicket which completely change the game.
2023’s economic outlook is gloomy…
With that caveat in mind, what of 2023? The economic outlook is gloomy. The US and most of Europe will be lucky to dodge a recession; it is mainly a case of how deep and how prolonged it will be. The UK is forecast to see its longest economic decline for a quarter of a century. Much will depend on what happens to energy prices over the winter months and whether physical supplies can be maintained in sufficient quantities to meet demand without rationing. Putin’s invasion caused significant discombobulation among governments, especially in Europe, and administrations are re-writing strategic energy policies on the hoof. If the situation appeared acute last Spring amid the confusion, some sense of order has been restored even though the cost has been considerable, as evidenced by the rate of inflation.
… but is the worst of the inflation crisis over?
Inflation has clearly been the dominant economic factor of 2022. Global bond markets have been the battle ground in which markets and the central banks have fought it out as to how best to beat inflation. Volatility has been brutal. But as we head towards 2023, investors appear more sanguine that the worst of the inflation crisis is possibly over (they have rung that bell before, of course!). Barring any further exogenous shocks, whether fire, famine, pestilence or conflict, the growing anticipation is that if not already at a peak, the rate of inflation is close to it across the western democracies, and that in 2023/4 it will subside.
If that’s true, different countries will likely see it decline at different rates (much of which will be decided by local labour markets: wage inflation tends to have greater duration and stickiness than other input costs such as commodity prices). It remains a moot point as to how aggressively from here the principal central banks feel the need to be either crushing inflation (which means also crashing the economy), or easing back and hoping that the medicine already administered will complete the job in a more benign fashion. That in turn will determine when interest rates begin to fall again, which will be reflected in bond yields. The differentials between prospective interest rates will be reflected in currency exchange rates, with the focus on the US dollar.
Geopolitical risks remain. It is impossible to predict the outcome of the Ukrainian venture and what might happen to Putin’s regime were Russia to be defeated, and what the knock-on effects might be beyond Russia’s borders. Iran, a rogue state, has been drawn in on Russia’s side in Ukraine. China is actively pursuing its New World Order, expanding its global sphere of influence; it still has explicit designs on Taiwan. Alongside North Korea and its missile tests, these risks are all still lurking.
Our summary a year ago is enduring. We might have seen elements of today’s conditions before, but none of us has ever seen them in their totality in our investment careers, however long they span. Opportunities are there to be taken, but new risks present themselves and must be managed or mitigated against. From an investment perspective, we believe it pays to be open-minded and adaptable rather than prescriptive and dogmatic. Aiming to keep up in the good times, trying to lose less in more challenging conditions, this is what we believe goes to the heart of compounding long-term wealth.
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
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