Reflections of the CIO
28 February 2023
February was a month characterised by a general reversal in investor sentiment and market prices. This change in direction was very broadly based, simultaneous across assets and global in nature. It wasn’t a huge reversal, with markets very roughly giving back half their January gains, but it was impactful nonetheless, leaving your investment team with the general impression that markets are currently meandering within trading ranges, awaiting the arrival of a more definitive trend to coalesce around.
The catalysts for the reversal again hinged around short term data releases in relation to inflation and growth. In January a modest undershoot of US inflation (6.5% actual versus 6.7% expected) helped accelerate a rally and then in February a modest overshoot of US inflation (6.4% actual versus 6.3% expected) helped catalyse a fall. That such small margins for error, in difficult to forecast variables, have such an impact is a neat illustration of our current, very fickle investment climate.
February was also the month during which bond markets, particularly in the USA, began to pay more attention to what Central Banks have been saying about interest rates needing to be ‘higher for longer’. They promptly began to sell off as the realization dawned that perhaps too much optimism over inflation had been factored in too quickly. This readjustment was quick, aggressive and doesn’t yet feel that it has finished.
The fact that other asset markets didn’t fall too aggressively whilst bond prices were dropping sharply, in a strange way could be taken as a positive. There is clearly some resilience in risk assets as they take account of a growth picture that is not as bad as feared several months ago. A resilient consumer in the West and a reopening Chinese economy are combining to underpin a modest ‘risk on’ sentiment. Although February is ‘one step back’ in this narrative, the preceding months have been more akin to ‘two steps forward’.
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For this stumbling progress to continue markets really do need to think through the longer term risks of interest rates potentially being higher for longer. If this does come to pass for any reasonable period then the risks of credit losses, demand destruction and a profits squeeze, all increase sharply and that would not be a good environment for most investments. Another risk is that the lagged effects of the interest rate rises so far have yet to be felt, meaning any additional increases from here will only serve to deepen the impact of recessionary forces which are already gathering steam.
Unfortunately, longer term thinking is not abundantly evident in the sentiment and momentum led markets of today. For your investment committee this means that we think we should continue to err on the side of caution in portfolios across all risk bands and be more tactical than usual in our trading – buying into sentiment led dips and taking profits during the less convincing rallies.
For the month ahead we can expect more interest rate rises, more growth and activity data and in the USA the release of the economic projections that the Federal Reserve is basing its thinking around. This will be eagerly anticipated and pored over for information on the ‘higher for longer’ interest rate question. We would expect markets to continue to wax and wane on shorter term data releases until we reach the point where there have been enough of them to actually illuminate an underlying trend. This can be a frustrating process, since it relies on the passage of time more than anything else, but we think a little patience now, coupled with an open mind, will pay off down the line. We will continue to keep you updated on our thinking, portfolio changes and outlook as events unfold.
All authors have considerable industry expertise and specific knowledge on any given topic. All pieces are reviewed by an additional qualified financial specialist to ensure objectivity and accuracy to the best of our ability. All reviewer’s qualifications are from leading industry bodies. Where possible we use primary sources to support our work. These can include white papers, government sources and data, original reports and interviews or articles from other industry experts. We also reference research from other reputable financial planning and investment management firms where appropriate.
The views expressed in this article are those of the Saltus Asset Management team. These typically relate to the core Saltus portfolios. We aim to implement our views across all Saltus strategies, but we must work within each portfolio’s specific objectives and restrictions. This means our views can be implemented more comprehensively in some mandates than others. If your funds are not within a Saltus portfolio and you would like more information, please get in touch with your adviser. Saltus Asset Management is a trading name of Saltus Partners LLP which is authorised and regulated by the Financial Conduct Authority. Information is correct to the best of our understanding as at the date of publication. Nothing within this content is intended as, or can be relied upon, as financial advice. Capital is at risk. You may get back less than you invested. Tax rules may change and the value of tax reliefs depends on your individual circumstances.
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