The basis for our determination to stay the course is our fundamental investment philosophy. At its very core, the Julius Baer investment approach relies on one simple fact: most of the time, the market is in an uptrend. So, most of the time, the best thing that investors can do is to stay invested, rebalancing their portfolio and adjusting its components as needed, without drastically increasing or reducing their exposure to risk assets as market sentiment invariably moves prices up and down.
To explore this further, download our Market Outlook Year-End 2022 Report here.
The big picture – look for lows
The economy needs to digest the tighter monetary regime. Applying the usual economic lags following a period of monetary tightening, a low in economic activity in this post-pandemic cycle is likely to occur sometime in the second half of 2023. Importantly from an investor’s perspective, however, looking at the usual sequence of events in financial markets and the economy, the low in financial markets tends to precede the low in the economy.
Given our economic outlook, the head-winds for risk assets should eventually ease, but it will likely take time to restore shattered confidence. A (re)test of the 2022 lows would be in line with previous tightening cycles, opening medium- to long-term entry points.
Over the summer of 2022, investors’ perception has shifted from inflation scares to growth fears. According to the current narrative, the base effects of price gauges and self-healing forces in the economy will be good enough to keep inflation rates falling into the new year (barring additional shocks to the system). This still means, however, elevated inflation readings beyond the comfort zone of central banks in the foreseeable future.
And it is here that growth fears set in: the price spikes in many goods and services are themselves a threat to growth, as they tend to kill off demand in order to rebalance the markets concerned.
The situation may be unwittingly exacerbated by policymakers, who are keen to stamp out anything resembling a self-feeding price-wage spiral but may overdo it and choke off the economy in the process.
The answer to the growth question will likely be the dominant driver of investor risk appetite into year end. Explore this further in our Market Outlook Year-End 2022 Report, available here.
The energy transition – the future is green
The energy transition is inextricably linked to the topic of sustainability, which has become an everyday term as awareness has grown around the need to look after our planet and safely coexist with each other.
The current energy crisis is accelerating the energy transition. The cyclical aspect of clean energy has also improved. Valuations have come down since the beginning of the year and are now at very reasonable levels.
In the mobility space, the transition towards electric vehicles is also firmly underway. We are convinced that the future of mobility is electric. For more insights on clean energy, download our Market Outlook Report here.
Equities – ready to rumble
While we keep a defensive tilt in our equity portfolios, we believe now could be a good time to look at battered stocks that have the potential to recover into year end. In order to find these stocks, our analysts have identified six key characteristics that describe them:
Investing matters – what to own into year-end
Portfolio construction is essential to harness the long-term capital appreciation in financial markets. A well-diversified portfolio with multiple sources of potential performance drivers, revised every now and then, not only increases longer-term growth prospects but also minimises the risk of setbacks.
It is important to have a clear, precise investment strategy, and then stick to it. Investors now have the opportunity to reassess their strategy. The months ahead should provide an attractive entry point to prepare for the new normal of financial markets, always mindful that ‘what to buy is more important than when to buy’. For the full exploration of this topic and more, download our Market Outlook Year-End 2022 here.
Thoughts from our Group Chief Investment Officer
It may be perplexing to some of our readers that we continue to recommend that investors stay invested. After all, a six-month market decline with little to no place to hide would most likely have justified going into cash sooner or later. And indeed, we would have been happier had we managed to capture less of the bear market. Nonetheless, we are convinced that we are currently in an ‘expansion’ regime where staying invested is the way to go.