Monthly Review – February 2023
OUR PERSPECTIVE
We’ve been relatively consistent in our view that the rally in risk assets since early / mid-October is merely a bear market rally within a much weaker backdrop. Indeed, retail sales and labour market data seemed to suggest a much-improved chance of a ‘soft-landing’, and even the ‘no-landing’ expression has gained in popularity. But either the consequences of a stronger economy, or the reality of a weaker backdrop, seemed to sink in as Capital Markets sold off in February. Looking a little deeper at the data, price hikes, seasonal adjustments and the ‘announcement-to-layoff-lag’ perhaps hid a much weaker reality in the US. Walmart’s weak guidance for the year ahead, with 2023 earnings guided as much as 10% below expectations, point to much weaker real demand and a ‘downscaling consumer’. Revenues at Home Depot, another industry bellwether, disappointed due to weak demand as inflation and a housing slowdown bite.
In aggregate, with over 94% of the 503 companies in the S&P 500 now having reported, earnings declined by -4.8% in Q4. Some of that is a result of the strong dollar and currency-effects, but even on a constant currency basis, earnings declined. Whilst fewer companies are concerned about inflation, profit margins in all sectors, bar energy and utilities, have contracted. Looking ahead, earnings revisions for the current quarter also continues to decline. What was an expected -0.2% decline in earnings at the start of Q1, is now an expected -5.7% decline.
Expected earnings and revenue growth for 2023 remains positive. We’re sceptical…at best!
EQUITIES
The bear-market rally came to an abrupt end in February, as weaker than expected earnings, margin declines and negative earnings revisions out of the U.S. bite. The UK and Japan stood out as exceptions – validating our overweight positions. China was the weakest market, but macro trends, fundamental data and valuations all point to an attractive opportunity.
FIXED INCOME
The market repriced inflation and interest rate expectations following positive retail sales and employment data out of the U.S. The expectation of “higher for longer” resulted in a sell-off in US Treasuries, amplified by widening spreads in Credit markets. Short term treasuries yielding close to 5% are looking very attractive, especially on a relative basis given current valuations in risk-assets.
REAL ASSETS
We remain underweight property given prices do not reflect the significant re-pricing of interest rates and of weakening demand. On the other hand, we remain positive on the outlook for infrastructure, especially in the renewable and digital infrastructure space.
Within the commodity complex, we remain positive on the longer-term trends. However, in the near term the risk of an economic downturn could put further pressure on prices, and we remain underweight generally. We retain an overweight position in gold, which, despite coming under pressure from higher rates this month, should benefit from a turn in liquidity, a weaking USD and falling real rates in due course.
SPECIALIST STRATEGIES
Specialist strategies continue to play a significant stabilising role within our portfolios. Managed futures and trend-following strategies continue to provide us with uncorrelated market exposure, and we believe the opportunity set for idiosyncratic strategies, including Arbitrage, Relative-Value and Fundamental Macro remain attractive.
CURRENCIES
Generally, we remain neutral on currencies. The USD seemed to reverse its recent trend and appreciated 3% in February. Currencies are dominated by trends, and if the stronger dollar trend sets in, the consequences could be ugly. We remain positive on the Japanese Yen, which we believe is both undervalued and under-owned, with clear catalysts for significant revisions.
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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Shard Capital Partners LLP is a limited liability partnership, registered in England with registration number OC360394. Shard Capital Partners LLP Registered office: Floor 3, 36-38 Cornhill, London, EC3V 3NG. Shard Capital Partners LLP is authorised and regulated by the Financial Conduct Authority in the United Kingdom, reference number 538762.
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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.
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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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