The economy: Inflationary pressure is easing… slowly
- Despite the fact that inflation continues to trend downward, levels remain far from central bank targets, and some fear that controlling inflation will be a slower process than anticipated.
- The reactivation of China and the sudden arrival of winter are two additional factors that hinder the swift easing of inflation in the short term.
- Given this scenario, the central banks—despite having moderated their discourse relative to recent months—maintain their restrictive monetary policies. Markets are taking into account a terminal rate of 5-5.5% in the US, which could hold steady for a good part of the year. But anticipating specific dates is risky.
- With regard to deflationary forces, several leading indicators expect US economic activity to weaken, especially in the real estate sector, though the labour market continues to show signs of resilience.
- The latest IMF forecasts confirm a global slowdown, but not a recession, reiterating the difficulty of anticipating the macroeconomic scenario.
Markets: A positive start to the year
- The reasonable assumption that inflation will eventually be contained has helped to quell uncertainty on stock markets, with the subsequent rebound of indices. Table 2 illustrates the performance of EDM’s investment funds in the first month of 2023.
- As inflationary risks recede, markets are increasingly focused on 2023 profit growth. In the wake of a very good 2022, percentage growth this year will be lower and more selective.
- A major correction among bonds has resulted in very attractive valuations for investors who seek “low volatility” portfolios.
Investment policy: quality investing
- Persistent inflation, concerns about the intensity of the economic slowdown, and geopolitical tensions are factors that will generate volatility in the first half of 2023, but the year will progress favourably once a clear end to interest-rate hikes is in sight.
- It is important not to confuse price volatility with the volatility of good businesses that remain unchanged: “Mr. Market” allows us to buy them at a discount.
- EDM’s portfolios are bolstered by top-quality securities, which is the best way to manage risk in today’s demanding environment. Our “rational optimism” is based on the positive evolution of the exacting selection we include in our portfolios: quality investing.
- Among high-yield and investment-grade bonds, we continue to see very attractive valuations for securities with questionable solvency. Thus, we can acquire sub-par bonds: “guaranteed” returns.
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- Market fluctuations due to unforeseen circumstances.
- Liquidity risk and other risks that alter the evolution of the investment.
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