December 2022
 

2022 was marked by inflation, rate hikes and pressure on the global economy. Will 2023 share these attributes? Here, Newton portfolio manager Keith Howell explains why he believes we are amid a multi-year regime.

Highlights:

• We anticipate 2023 will provide further evidence that we are in a new multi-year regime, characterized by higher rates and inflation than we have seen in the last decade.
• We think value-oriented companies with better relative earnings trends are well positioned to outperform the broader market as we navigate onward to 2023.
• We anticipate “old economy” investment strength, supported by several drivers including onshoring, automation, electrical infrastructure and efforts that alleviate supply constraints.

In 2022, markets declined as persistently high inflation, aggressive rate hikes and a reduction of liquidity put increasing pressure on the global economy. We anticipate 2023 will share key similarities with 2022, providing further evidence that we are in a new multi-year regime, characterized by rates and inflation that are higher than we have seen in the last decade.

The Federal Reserve (Fed) largely spent the second half of this year reiterating the importance of reining in inflation to more appropriate levels. In 2023, we expect the Fed to continue this steadfast commitment to raising interest rates and sustaining quantitative tightening until data shows a material deceleration in pricing pressures. Even when these inflationary pressures moderate, we believe they will remain above the trend of the last decade. More positively, the US is experiencing continued robust employment trends and consumer savings appear strong, thanks to the fiscal stimulus measures of 2020 and 2021. However, the overall economic growth outlook looks increasingly challenged owing to the Fed’s aggressive tightening stance.

These near-term economic pressures are likely to usher in a phase of reduced earnings expectations. However, value stocks widely protected investors in the challenged environment of 2022, and we think value-oriented companies with better relative earnings trends are well positioned to outperform the broader market as we navigate onward to 2023.

Volatile macroeconomic and market dynamics can make it difficult for investors to find returns. We believe companies with strong balance sheets and cash-flow generation, trading at attractive prices compared to their future cash flow-generating power, provide compelling investment opportunities. It is also important to be effectively positioned for when this period of stifled economic growth eventually abates, and cyclical companies can take advantage of a potential upswing in the market. Such cyclical companies are well represented in the value space and have historically led in market upcycles following downturns.

Looking ahead, we expect segments of the market will continue to digest the pull forward of demand brought on by the pandemic. Furthermore, we anticipate ‘old economy’ investment strength, supported by several drivers including onshoring, automation, electrical infrastructure and efforts that alleviate supply constraints. This new market regime should place a greater emphasis on profitable and sound business models as investors hunt for returns. Finally, we expect 2023 to be a market conducive to our long-standing US large-cap value and income philosophy of focusing on opportunities at the intersection of valuation, fundamentals and business momentum.

As always, we are actively using pockets of near-term volatility to try to identify attractive relative opportunities. We continue to be constructive on cyclical areas of the market that provide strong relative value and robust balance sheets through uncertain times. We are selectively finding cash-flow stability at attractive valuations and catalyst-driven business improvement.