What have driven markets in 2022?
2022 has been an annus horribilis, as once famously coined by our late great Queen Elizabeth. A year of inflation, interest rates, conflict, a lingering pandemic and increasing multi-polarism.
We have consequently seen a correction in the multiples investors are willing to pay for certain assets, especially high growth assets, as they adjust to a change in risk premia, and it is that de-rating to which the majority of negative returns can be attributed this year.
How will markets likely evolve in 2023?
We expect the source of market risk to shift from valuation-risk to earning risk as investors anticipate the highly likely downgrade to future expectations.
The knock-on impact of 2022’s forces will likely trickle through to consumer spending, industrial capex and corporate earnings in 2023 to the point that our economists now expect next year to be the weakest year for growth outside the pandemic since 2009.
We had expected to see some evidence in Q3, and we did, but not as much as the macro indicators would suggest, so we await what will be a tough Q4/full year reporting season in the early part of 2023.
As Warren Buffet once said, “it's only when the tide goes out that you learn who has been swimming naked” and it is in that forthcoming environment that we think that the companies with the strongest sustainability credentials, the strongest pricing power and the strongest cultures will wade through the tides (with their costumes on) and show their true worth.
The focus and conversations around sustainability are likely to evolve in 2023?
On the sustainability front, the world keeps turning. We have spent much of 2022 focusing on company's climate ambitions and targets, and will continue to in 2023, but the attention will evolve that foundation into a discussion on broader environmental issues like biodiversity, natural capital and deforestation.
We continue to strongly believe that companies who operate with “corporate karma” by treating all their stakeholders fairly stand to benefit in the long run, and no more so is that true in the environment we find ourselves in today.
Our inclusive multi-stakeholder approach to sustainability has helped us to avoid areas of over-valued or over-crowded companies, and our long-term mindset, focusing on the durability of compounding investment returns through the cycle, has also helped us to pick up some bargains buffeted by the market's recent volatility.
Whilst there are certainly some short term pressures on profitability for investors to consider, the recent rally in markets gives us some optimism that we are nearing the trough in some areas and we are cautiously optimistic into next year.
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