By Artemis’ CIO, Paras Anand.
Pivot points like this send tremors through the markets. Bonds have experienced their worst year in history. The rocketing growth stocks that have driven equity market returns since 2008/9 have suddenly run out of fuel – low-cost capital – and come tumbling back to earth or to a much lower orbit. Zombie companies are going under – at least in public markets.
Many investors are settling in for a new world order. But we have to be careful not to put on the blinkers too quickly. If the past couple of years has taught us anything, it is that surprises come from unexpected places at unexpected times.
Predicting the unexpected is not, therefore, the exercise in futility it may seem. It can pay to remain alert to the possibility of surprises and to challenge widely held assumptions. So here goes…
A demand shock from China
It has become fashionable to see China as a country in trouble. Do not underestimate its impact.
In the wake of the Global Financial Crisis, it was the extensive stimulus (mainly fiscal) from the Chinese government that pulled the whole global economy out of recession.
The Chinese economy is much bigger today – it has trebled in size since 2008. The strict zero-tolerance Covid regime has had a huge impact and suppressed the demand side of the equation globally. China need not bounce-back very strongly for us to feel the impact.
That said, we must assume the Chinese have pent-up demand, as we did here. So a bounce-back may be stronger than we imagine. This should be positive for the global economy and especially positive for Asia – but not so good for inflation. Economics is never simple!
A positive year for Japan
For years, commentators trying to spot rays of light amid the economic gloom have questioned why Japan is known as the Land of the Rising Sun. Stagflation, a shrinking population and outdated corporate practices have meant Japan has been a perennial disappointment.
But it is perfectly possible to envisage that story changing in 2023. This is the world’s third-largest economy. The weakness of the yen is good for manufacturing. Japan could be a massive beneficiary of a more prosperous Asian economy. It has experienced a lot of corporate reform that should make it better placed to succeed.
And this is one country in the world that would embrace a bit of inflation.
Old companies can learn new tricks
We talk a lot about disruptors and their impact on the ageing incumbents in various sectors.
But many of these disruptive companies, with their new tech and their focus on building scale over profitability, have hit a wall in 2022.
That does not mean disruption is dead. We need to revisit the assumption that old companies cannot change. Rising interest rates will increase profitability in the banking sector, for instance, making investment in tech more possible. Some of the most promising companies in a portfolio like Artemis’ UK equity income strategy are over a hundred years old.
They have survived by changing, and they will continue to do so. Do not assume they cannot disrupt themselves.
Productivity will pick up
Tied to the above point is the question of productivity. Why is it that we have lived through a decade of enormous technological advances yet seen little improvement in productivity? This seems counter-intuitive.
The issues we are facing now in the economy could well change that.
Rising wages in a world with relatively low unemployment incentivize investment in automation and technology. Rising prices drive us to look for efficiencies, and they incentivize those not-so-clumsy giant incumbents I just talked about to adopt radical new technologies more widely.
There may be a productivity boom just ahead of us. That should feed into higher profits and, ultimately, higher dividends and share prices.
So… keep an eye out for those surprises
I realise these would-be surprises are all generally positive, and maybe that is the final assumption I want to challenge – the widespread belief that 2023 will be bleak.
It might be, but after the surprises of the past couple of years, it would be nice to have some pleasant ones.