Monthly Review – December 2023
OUR PERSPECTIVE
Over the course of 2023 many investors misjudged the multiplier effects from fiscal policy and the benefits this brings from a liquidity perspective. The cherry on the cake was the long-awaited and much anticipated Fed-Pivot as the global economy benefitted from disinflation, robust labour markets, and continued upside surprises to consumption.
This month we ask, are the benefits from fiscal and monetary policy sustainable?
The benefit from monetary policy is really the marginal change in interest rates – or more specifically: the cost-of-capital – relative to the absolute level, and the resulting benefits this has on credit creation. However, one needs to also consider the incremental Capital-Output-Ratio which highlights the number of units of investment (think debt!) required to generate one unit of GDP growth. Chart 1 highlights the level for the U.S, China and South Korea. The point is, an enormous amount of debt is needed and the cost of this debt is paramount. At prevailing market rates, further credit creation is problematic at all levels: corporate, government and household debt.
From a fiscal perspective, monetary policy has knock on effects given the amount of debt in the system, the cost of debt and already large deficits. An even bigger concern is Net National Saving. Net Saving (different from savings) comprises three elements: private saving (from households and businesses), foreign saving (inverse of the current account), and government saving (the inverse of government spending). Adequate saving is essential for the sustained growth of a country’s capital stock. It is crucial for budget deficits to be reduced during economic expansions so that when bad times hit, we are able to fight back. Typically, when a downturn occurs, private saving declines whilst government dissaving increases due to a surge in spending and a drop in tax collections.
Chart 2 highlights that Net National Saving in the US has gone negative only twice before in history, during the GFC and Covid. Both of these were driven by surges in government dissaving. The fact that we are already at negative levels today is a significant concern and will not only impair economic growth well after the Fed start to cut policy rates, but our ability to support a recovery.
Tread cautiously!
To view our graphs and data tables, please download the full article above.
EQUITIES
Equity markets had a strong finish into year-end as the long-awaited Fed-pivot finally hit markets. We remain underweight equity markets due to the risk-reward outlook, specifically US equities which we believe are overvalued. We remain overweight Japanese equities but note the negative correlation between the Japanese equities and the Japanese Yen.
FIXED INCOME
The Fed-pivot and high real yields provided a catalyst for a continued rally in bond markets. We remain neutral, and specifically overweight the short-dated government bonds where yields look attractive, and risks limited. Credit spreads remain very tight and given the significant rise in interest rates and material refinancing risks, credit markets are not being priced accordingly and we remain underweight.
REAL ASSETS
Energy prices continue to fall as the market focus on oversupply in US Nat Gas markets alongside a global slowdown in demand. Gold continues to shine. Given the hedge it provides against monetary devaluation and event risk, alongside strong price momentum, we retain significant exposure and remain bullish on the shiny stuff.
Listed Real Estate and Infrastructure markets rallied on the back of the Fed-pivot. As we mentioned previously, we continue to be wary, with specific concerns around commercial real estate markets given the differential between cap-rates and short-term government bond yields
SPECIALIST STRATEGIES
Our specialist strategies continue to play a significant stabilising role within our portfolios. Our managed futures & trend following exposures had a difficult finish to 2023 as the swift change in sentiment and market rally generally caught positioning off-side. We retain significant conviction and a positive outlook for the specific strategies we own. Our market neutral and relative value hedge fund exposures had another good month despite low equity correlations. We retain limited exposure to private markets, both credit and equity, given our concerns regarding debt and the refinancing cycle.
CURRENCIES
We remain broadly neutral on currencies. On the margin we note that changes in interest rate expectations would support a weaker USD and likely to imbed recent trends. The US Dollar however remains the global reserve currency of choice, and in a severe market sell-off, we expect it to do well. We retain our positive view on the Japanese Yen, which we believe is undervalued with clear catalysts for a potential revaluation on the horizon.
CONTACT US
For further information on any of our services, or if you would like to arrange a meeting with an investment manager to see how we can work with you, please get in touch.
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This document is provided for information purposes only and is intend for confidential and sole use by the recipient. It is not to be reproduced, copied or made available to others. The information set out in this document does not constitute investment advice or a personal recommendation. The views expressed in this document are not intended as an offer or a solicitation, to purchase or sell any security or other financial instrument, credit or lending product or to engage in any investment activity.
Past performance is not a guide to future performance. It is important that you understand that with investments, your capital is at risk. The value of investments, as well as the income derived from them, can go down as well as up and investors may get back less than the original amount invested. It is your responsibility to ensure that you make an informed decision about whether to invest with us, based on your particular objectives. If you are still unsure if investing is right for you, please seek independent advice.
The information and opinions expressed within this document are the views of (the company) and are based on information we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. Any information provided is given in good faith but is subject to change without notice.
No liability is accepted whatsoever by (the company) or its employees and associated companies for any direct or consequential loss arising from this document.
Disclaimer:
This document is provided for information purposes only and is intend for confidential and sole use by the recipient. It is not to be reproduced, copied or made available to others. The information set out in this document does not constitute investment advice or a personal recommendation. The views expressed in this document are not intended as an offer or a solicitation, to purchase or sell any security or other financial instrument, credit or lending product or to engage in any investment activity.
Past performance is not a guide to future performance. It is important that you understand that with investments, your capital is at risk. The value of investments, as well as the income derived from them, can go down as well as up and investors may get back less than the original amount invested. It is your responsibility to ensure that you make an informed decision about whether to invest with us, based on your particular objectives. If you are still unsure if investing is right for you, please seek independent advice.
The information and opinions expressed within this document are the views of (the company) and are based on information we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. Any information provided is given in good faith but is subject to change without notice.
No liability is accepted whatsoever by (the company) or its employees and associated companies for any direct or consequential loss arising from this document.
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