Market round up – a walk around the major asset classes
At Premier Miton, we don’t have a prescribed ‘house view’ on markets or asset classes, we like our fund managers to have the freedom to build their own opinions. Good independent thinking is not simply thinking by oneself and holding one’s views resolutely, but rather a combination of thinking carefully and a willingness to engage with others with an open mind.
When it came to creating a round up of the market in 2022 and a look forward to 2023, we thought of no better way than capturing the view of five different fund managers – each one expressing an opinion of the asset class they are experts in. Because in our view, diversity of thought can really help create better investment outcomes for clients.
Lets start our walk through the asset classes here in the UK.
UK equities: Emma Mogford – Monthly Income fund manager
2022 round up
UK equities were one of the best performing markets in 2022. Some dismiss this as simply due to a high exposure to energy companies, and they certainly performed extremely well, but in my opinion, it was also driven by a move towards cheaply valued mature companies which offer profits today rather than growth companies which promise profits in the future.
The strength of the market was despite some weakness in the UK economy and concerns over political decisions, which highlights how global the UK equity index has become. It was a year for the larger companies with the FTSE 100 outperforming the mid-caps in the FTSE 250. In addition to energy and mining companies performing well, it was also defensive sectors like tobacco and defence which delivered positive returns for investors
Looking ahead to 2023
I expect interest rates will be materially higher 2023 which will place stresses and strains on the global economy and on equity markets. Unfortunately, economic conditions may have to get worse before they get better and that is because rapid coordinated global interest hikes are likely to take further liquidity out of the market and make it harder for companies to pay interest bills, triggering higher unemployment and some bankruptcies.
As always there will be winners and losers in this environment and for me it will be companies which are highly profitable and have strong balance sheets which will be the most resilient. Valuation will matter, which is one of the reasons I think UK equities are so well placed.
Global equities: Alan Rowsell – Global Smaller Companies fund co-manager
2022 round up
Global equities fell in value in 2022 although the decline for UK based investors was somewhat mitigated by the weakness of the British pound. The main reason for the drop was the sharp rise in inflation and the response this triggered from global central banks with interest rates rising dramatically. As a result of this policy tightening, economic growth slowed with many countries entering recession.
Russia’s invasion of Ukraine created huge problems in commodities markets with oil, gas and food prices rising. Sanctions imposed on Russian gas led to an energy crisis in Europe, adding to inflationary pressures.
In most countries, Covid restrictions were removed allowing economies to reopen and supply chains to ease. China was the notable exception where the zero Covid policy meant lockdowns remained a constraint on the economy.
The first half of 2023 will likely see a further slowing in the global economy as tighter monetary policy takes effect. This will likely lead to a decline in corporate earnings which could pressure share prices. However, inflation is likely to moderate from current elevated levels which could bring an end to the tightening cycle by mid-year. Given the forward-looking nature of stock markets, this may lead investors to look for better times in the second half of the year.
Fixed Income: Lloyd Harris – Strategic Monthly Income Bond fund co-manager
2022 round up
2022 was an extremely challenging year for fixed income with both government bonds and riskier forms of the asset class, such as credit and emerging markets selling off.
Whilst we expect 2023 to not be without volatility as monetary policy continues to tighten, returns on offer from fixed income may look more attractive. These returns may help to insulate the investor against further bouts of market turmoil that are likely to arise from quantitative tightening. We think the sweet spot within fixed income is short-dated investment-grade credit, offering the best risk/return characteristics and an opportunity to generate a real return.
Other forms of fixed income such as government bonds are unlikely to give such a return in 2023 and riskier forms of credit, such as high-yield are going to be subject to permanent capital destruction with the mix of slowing economies, tightening monetary policy and elevated inflation making life particularly difficult for highly levered companies.
Property: Kirsty Riddle – Pan European Property Share fund co-manager
2022 round up
2022 has been a challenging year for property. Typically, a beneficiary in an elevated inflationary environment, assets have been undergoing a repricing as property yields adjust from historical lows in response to rapidly increasing interest rates, as central banks try to control economically damaging inflation levels.
Occupational markets have remained robust across most subsectors, with demand increasingly shifting to those highest quality, fit-for-purpose, sustainable buildings with often insufficient supply, and this has resulted in low vacancy and rental pricing power, with Continental Europe frequently benefitting from index-linked leases.
As such, outward yield movements which drag on capital values are often being (partially to substantially) offset by rental growth, whilst earnings have broadly been protected from rising rates with low debt costs locked in for the medium term. Steep share price discounts to asset values were prevalent, with macroeconomic uncertainties and investors awaiting clarity on where interest rates will settle.
The negative sentiment around the property sector, perceived as a bond proxy, appears to be well reflected in share prices, with shares trading at extremely wide discounts to underlying net asset values. Whilst volatility is likely to persist, the sector has the potential to offer high total shareholder returns should the sector re-rate as inflationary pressures ease, interest rate hikes end, and property repricing finds solid footing.
In the meantime, those quality companies underpinned by structural rather than cyclical demand drivers, with conservative leverage and fixed interest rates should outperform in a more uncertain macroeconomic environment
Infrastructure: Jim Wright – Global Infrastructure Income fund manager
2022 round up
We can identify four phases of performance for listed infrastructure during 2022, in what was an eventful year. Firstly, after the sector absorbed the shock of the Russian invasion of Ukraine in late February, the recognition of the value of energy infrastructure assets provided a positive tailwind. This was enhanced by the passage of the Inflation Reduction Act in the USA in July – a genuinely game-changing piece of legislation for existing and embryonic renewable energy and low-carbon infrastructure.
However, optimism was dampened, and stocks weakened in the third quarter with concerns over the impact of rising interest rates on the sector. Finally, the reckoning as we reached the end of the year reflected a more nuanced view on rising rates – a sector with embedded inflation-linked revenues and lots of structural growth does not look a bad place to be going into 2023.
For the next twelve months, we see the fundamental attributes of listed infrastructure continuing to support sector valuations. Long-term themes such as the energy transition, the value of secure and stable energy infrastructure assets and the continued growth in demand for reliable high-speed data networks underpin the investment case for existing assets and create valuable growth opportunities for the companies in our fund.
When combined with inflation-linked revenues which provide a cushion against elevated levels of inflation and rising interest rates, we believe the sector continues to offer a compelling opportunity to investors.