January 2023 Monthly Review

Markets are out the gates and running for 2023!

"Global stocks had their best start to a year for four years as the Nasdaq had its best start in over 20 years."

By Portfolio Advisor Paul Sedgwick

Dear Partner

Market Commentary

Global stocks had their best start to a year for four years as the Nasdaq had its best start in over 20 years. Hopes the Fed (Federal Reserve) will ease the pace of monetary tightening boosted stocks, along with a more upbeat Davos conference than many had anticipated, and continued weakness in energy prices. Many of the trends that dominated the past year reversed in January as market sentiment improved from the uncertain end to the year. The continuing indications around the globe that inflationary pressures were easing and that energy prices, particularly gas prices falling further added to the hope that the Federal Reserve would turn more dovish in the coming months. Bonds and the Technology sector led the rally, the consumer discretionary sector outperformed staples, another sign speculators had become more optimistic. The price of gold rallied as the dollar weakened, and commodity prices, aside from energy, also had a good start to the year. Nearly all major financial assets outperformed their post Global Financial Crisis average returns in January.

Total Return Balanced and Total Return Equity Portfolios

Our portfolios benefitted from the general recovery and rose well in January. We added Alphabet to the portfolios as we were conscious that the technology sector had materially underperformed last year as rising bond yields impacted growth sectors. As longer-dated yields fell, there was the potential for recovery as valuations in some leading names had become more attractive.

Procter & Gamble reported earnings in line with expectations as sales and earnings grew year on year, and JPMorgan analysts raised its share price target for the company as they forecast strong US and China demand for products in the consumer staples sector. Morgan Stanley rated Procter & Gamble as its top pick in the household products sector.

Disney’s share price increased during the month after activist investor Peltz pushed for a board seat, seeking a governance change. Estee Lauder received an uplift in the share price target from JPMorgan. Estée Lauder reported Q2 FY 2022/23 results with better-than-expected profitability but reduced guidance, largely in line with consensus.

Merck reported in early February +2% growth in Q4, as well as a reduced forecast for 2023, which was lower than expectations.

Merck’s share price was +45% in 2022 following continued market share gains for Keytruda (oncology drug) and Gardasil (HPV vaccine).

Shell indicated in its prelims that it had a strong fourth quarter, especially in its LNG (Liquified Natural Gas) trading division, despite suffering from plant outages. It also paid an additional $2bn windfall tax across the EU and UK imposed on the energy sector. Full-year results announced in early February were strong as the company benefitted from the higher energy prices, and the company reported record profits of $40bn. Shell also announced a new $4 billion share buyback programme over the next three months, unchanged from the previous three months. The new CEO, Wael Sawan, has reorganised group operations to create efficiencies by combining the oil & gas and LNG divisions, representing the Group’s most profitable business units.

3M reported macroeconomic pressures had impacted results and will further have effects in 2023. and that the Group would reduce the workforce by 2,500 people in manufacturing. Furthermore, legal issues remain regarding its ear defender contracts. Organic sales were +0.4% in Q4 and missed expectations, with December sales impacted by poor consumer-facing markets and COVID restrictions in China. The Group has announced intentions to spin off its healthcare division as a standalone company.

Diageo reported slower growth in the US which affected the share price on the day of the earnings announcement. Investec analysts upgraded the stock to Buy due to the share price decline; it noted that any US slowdown was likely temporary and left medium-term guidance unchanged.

THG reported record group revenue for 2022, with growth in its three core businesses, and announced a continued strategic review for its loss-making categories and territories within the THG OnDemand unit. The company holds £640m cash on its balance sheet.

Microsoft announced the lay-off of 10,000 staff, amongst an earnings report of slowing but still significant growth in Azure cloud services and consumer spending declines in personal computing. Sales were up 2% in the last quarter, while profits fell 12%. There was a significant focus on Artificial Intelligence integration across Microsoft’s products and a further $10bn investment in ChatGPT. The continued strength in cloud services was well received by city analysts.

SAP reported positive full-year results, with cloud revenue up 33% and its essential cloud product S/4HANA up 101%, indicating a strong backlog of €12bn cloud orders. Its 2023 outlook anticipates accelerating topline and double-digit operating profit growth, with a reduction in its workforce of 3,000 jobs in 2023 and the potential sale of its stake in Qualtrics. In line with the tech sector, the job cuts are in the face of potential weaker demand as customers cut spending.

Rio Tinto was positively impacted by Goldman Sachs and Credit Suisse analysts during the month as they cited an expected recovery in steel production and demand for iron ore shipments. Q4 prelim results were strong, with shipments up 5%. Longer-term, Rio Tinto is pivoting to commodities needed for future technologies, such as copper and lithium, which are used to manufacture electric vehicles (EVs). Copper prices were up 10% during Q4 2022.

Outlook

The anticipated path of US interest rates will influence investor sentiment in the coming months. After four consecutive 75 basis point rises in 2022, as the FOMC (Federal Open Markets Committee) engaged in one of the most aggressive tightening cycles in recent history, the last meeting of the year saw the Fed slow the pace to 50 basis points as indications that inflationary pressures were easing, taking the Fed funds rate to 4.5%. Further signs that the inflationary pressures were weakening had led the market to expect a further slowdown to 25 basis points at the first meeting of 2023, and the FOMC duly obliged. As important as the decision itself is the accompanying statement. The Fed has to weigh up the balance between inflation expectations falling, but still above their 2% target. The continuing strength of the labour market, which argued for maintaining their hawkish stance, against indications that the outlook for the US economy looks mixed at best. Jerome Powell did tread a slightly more dovish path, reverting to the data-dependent stance, whilst also preparing the market for further rate rises in the coming months. The members of the Fed may have also been encouraged to slow the pace of rises this month as longer-term inflation expectations remain anchored around 2%.

Despite the recent optimism helping boost stock markets, one has to remain wary of the uncertain outlook. The fourth quarter earnings season has been mixed at best as many blue chip companies highlight weak consumer demand and a softer outlook. The Federal Reserve slowing pace of rate rises partly reflects concerns about economic growth as well as the improving outlook for inflation. Historically, during economic uncertainty, the Fed would be looking to loosen monetary policy and not tighten it. The Bank of England and the ECB (European Central Bank) followed on from the FOMC, raising rates by 50 basis points. As strikes, and as the IMF (International Monetary Fund) report highlighted this week, our tight fiscal policy is currently hampering economic activity in the UK, growth in the UK is now forecast to shrink in 2023. It will be interesting to see if this influences the Chancellor in the March budget to rein in some of his proposed increases.

Our core philosophy is to invest in companies which we feel are ingrained into the global economy. At times their fortunes may wax and wane, but they grow alongside the global economy over the long term.

Yours sincerely

Cube Capital