Rates, potential recession and finding opportunity: CLAM fund managers look ahead to 2023
David Marchant, Chief Investment Officer, Canada Life Limited & Managing Director, Canada Life Asset Management Limited
It has been a remarkable year. And one which again has taught us that, despite what we think we know, there are always events out there waiting to trip us up. It is a reminder to investors that we don’t know everything and can’t predict the future with any certainty, despite what some forecasters might have you believe. And so, diversification, not getting swayed by the latest noise in the markets, conservatism and taking a long-term perspective remain as important as ever.
Looking to 2023 and beyond, it is easy to be negative. The news is gloomy and for many, next year is going to be tough as consumers get squeezed by higher taxes, inflation and wages struggling to keep up. Yet a lot of this has been reflected in equity and bond markets already and if we look further ahead we can perhaps see some positive signs. Inflation is likely to be close to a peak and as we progress through the year the comparison with 2022 will look much more favourable.
So we enter 2023 at an ‘interesting’ time. But how often has that been the best time to invest? There will certainly be some surprises, both positive and negative, but I do believe we will start to see signs of improvement and, as ever, markets will react well ahead of its arrival.
David Arnaud, Senior Fund Manager, Fixed Income
Recently, it has felt as though maximum hawkishness is approaching as central banks appear to be getting closer to reaching their terminal rates. The US Federal Reserve (Fed)’s communication has now been adjusted to reflect a deceleration in the magnitude of future hikes: although it is going to keep increasing rates, it will be at a slower pace.
This has triggered a shift in market anticipation and yields have subsequently come down. The slower CPI prints we have recently seen are also feeding into this narrative. Central bankers are still engineering a tightening in financial conditions to tame inflationary forces, but their messaging is softening as it is becoming clearer that most advanced economies will enter a recession during 2023.
In terms of the effect on fund positioning, this shift means that there is now a case for reducing the short duration positioning with the aim of entering into a long duration stance over the next quarters. Despite recessionary fears creeping in, we think that the rate environment prevailing over 2023 will bring back interest in credit markets. There will be a strong investment case to be made in sectors that have endured a sharp devaluation during 2021-22 such as the financial sector, which is fundamentally in a stronger place than pre-Covid.
We also anticipate an end to the US dollar bull run that has dominated markets this year. The US dollar is pretty much the only asset class besides commodities that has generated a positive return this year. We are approaching the end of that cycle, as can be seen by investors’ reaction to recent inflation prints being lower than expected.
The underlying dynamics in fixed income markets have started to improve, with current valuations offering interesting opportunities, but for me the real turning point will be once the last Fed hike comes into sight. There is not going to be full-blown optimism going into next year, but I believe that, for fixed income portfolios, it will be better than this year.
Steve Matthews, Fund Manager, Liquidity
There are beginning to be signs of peaking for the first half of next year and we expect to see a slightly slower trajectory of rate hikes from the end of the year.
As ever, it is all dependent on how we get through this winter. Already in the UK and Europe there are clear signs of recessionary activity. No-one is clear on how it will impact the consumer and their spending patterns. The panic of September seems to have abated a bit, but despite the government packages, there is still going to be a year-on-year increase in people’s expenditure. For one thing, people are inevitably going to be moving onto much higher mortgage rates.
As far as our funds are concerned, we are still very much barbell; 90:10 – 90% keeping it very short so that we’re rolling over the maturities into the new rates; 10% looking at the opportunities for investing at one year. We are beginning to take one-year positions where we see that there are opportunities to add yield without necessarily the interim capital loss positions that we have seen while rates have been going up.
To echo what David has said, we are very close to looking at maximising our duration position, on the LF Canlife Short Dated Corporate Bond Fund and the LF Canlife Sterling Short Term Bond Fund.
Stuart Taylor, Senior Fund Manager, UK Equities
It’s hard to disagree with any of the above. Obviously, it’s going to be a tough winter. But I would just say that we know a lot of this already; it’s in the papers every single day. At some point the market is going to look through this; we could be seeing it already. The banks already have massive provisions for a recession and I can’t help thinking that the UK consumer is going to be more resilient than we are all expecting. Unemployment’s still low; it’s going to go up – it’s got to, really – but I can’t help thinking it’s going to stay lower than a lot of the banks have in their models.
So, as much as anything else, I’m looking for opportunities. David’s comments on looking to go longer duration were interesting. Similarly, I’m balancing up whether I want to buy more of the expensive, defensive stocks versus a lot of the value that I can see in the UK – particularly in the retail and financial services sectors, which have both been hammered.
I think there’s some great value out there, and when the market turns, it might turn quite quickly. I don’t want to miss it.
Jordan Sriharan, Fund Manager, Multi-Asset
Multi-asset portfolios have had an extremely difficult year, principally because no asset class has escaped unscathed from the volatility of 2022 – not bonds, nor equities or property. However, the more recent volatility over the past few months has allowed us to exploit many more opportunities in our portfolios.
One focus for us is assessing our exposure to the US dollar. It has moved up sharply over the year but we believe the tide has started to turn. Consequently, we’re talking about whether selective regions within emerging markets are now attractive as beneficiaries of a weaker dollar. We’ve already started hedging US Treasuries exposure in our multi-asset portfolios and there may be opportunities to hedge overseas equity exposure, particularly in the funds where we are most exposed to North America.
We have been buying the UK midcap index for the past few weeks. UK large cap has done extremely well versus the rest of the world because of sterling weakness and their predominantly international revenues. If this trend were to reverse, that could open the door for midcap outperformance. In adding strategically to our mid-cap positioning over the next few months and quarters we can build towards our medium-term positioning. We’re not trying to catch the bottom of the market, but want to be well-positioned for when the cycle turns.
In the LF Canlife Diversified Monthly Income Fund, we have maintained our conviction in alternatives, specifically in the UK renewables sector, which is an area of growth despite regulatory pressures. Where we are income-focused, these positions provide long-term cash-flows linked to CPI, and we believe they have a long-term place in the portfolio. As 2023 progresses there are likely to be more opportunities to invest in the infrastructure space, most notably in Europe-based companies.
Bimal Patel, Senior Fund Manager, Global Equities
Markets have been very much focused on the inflation data points and in the US it appears as though a disinflationary path is now ahead of us. Per Stuart’s comments, there are opportunities out there in good companies, but we do need to be aware of the economic slowdown ahead. Therefore, we’re looking at cash flows and so on to ensure that the companies we’re investing in are robust enough to handle what is inevitably going to be a slowdown.
But we very much support the peak hawkishness thesis. In our view, so inflation concerns are morphing into GDP growth concerns. We are considering how bad the recession is going to be - if the Fed pivots into a more dovish policy, maybe the recession will not be as bad as everyone expects.
We’re looking for opportunities to invest over multiple years. This year was very macro-driven so it almost didn’t matter where you invested, but we are looking for bottom-up ideas as the inflation and the macro aspects start to diminish in importance.
The value of investments may fall as well as rise and investors may not get back the amount invested.
The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice.
The LF Canlife Diversified Monthly Income Fund may invest in property funds that may be illiquid and subject to wide price spreads, both of which can impact the value of the fund. The value of the property is based on the opinion of a valuer and is therefore subjective.
Canada Life Asset Management is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
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