The past 12 month have been another period of tail events materialising. As we learned to ‘live with COVID’, the impact of stimulus has been felt on the economy and the market. Along with supply-side tightness, including in energy markets and broader supply chains, demand has been strong as consumers shift from buying goods (requiring delivery) to buying services. Inflation rose, as did interest rates – aimed at addressing the demand-side inflation.

Many forecasters, believe that corporate earnings forecasts are too high and will fall as a recession hits the economy. What we do know is that the price of energy has fallen to well below that seen at the commencement of Russia’s invasion of Ukraine earlier in the year.

Crude Oil USD

Another key input into inflation is wages, which have started moving higher (3% in Australia).

Wage Price Index (WPI) – Australia 

The inflationary environment has been relatively benign for a protracted period, during which time interest rates have steadily fallen, providing support for asset prices.

Annual Inflation – Australia

Rather than attempting to predict global macro movements, and actively positioning portfolios for an expected macroeconomic outcome, we think time is far better spent understanding the two or three operational drivers that determine a business’ prospects. Perhaps 2023 may provide a catalyst for investors to consider their return targets. In many instances, riskier assets (e.g. unprofitable “moon shots”) are not required to achieve return targets.

Alex Leyland

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