The global economy remains in a difficult position, but early signs suggest 2023 could be a year of recovery for markets, a local Guernsey audience has heard.
Inflation, interest rates, and currency values all continue to dominate the economic agenda and impact market performance, according to Julius Baer’s Head of Research.
Christian Gattiker was visiting Guernsey in-person for the first time since 2019 to address the Swiss wealth management group’s bi-annual Market Outlook event. He outlined the rises in interest rates that central banks have introduced around the world as a means of fighting inflation but predicted that Q3 of this year would mark “peak hawkishness” for those institutions.
A hawkish approach to monetary policy generally favours rising interest rates as a means of controlling inflation, despite the impact on economic growth and consumer spending. This is in stark contrast to the UK Government’s ‘fiscal event’ in September.
“For the UK, everything changed within a week,” said Mr Gattiker. “It’s been fascinating to watch how the markets blew up after the announcement. The central bank is trying to fight inflation, but the UK Government came out full throttle going for growth. It’s like putting the pedal to the metal in your car while the hand break is still on.”
Mr Gattiker said that his team had rarely seen such a stark change in economic policy from a government, and had never witnessed a market reaction like that experienced in the wake of the UK Chancellor’s announcement on 23 September.
“This is an emerging market crisis, not a developed market one,” he said. “We normally see this sort of thing when an emerging market does something silly and global investors pull out, not when an established economy makes a budget announcement.”
The global picture
Around the world, central banks were keeping interest rates high as economies recover to the major stimulus packages announced to combat the effects of the pandemic. Economies, Mr Gattiker said, had been overstimulated and then the world faced a supply shortage, which resulted in rising inflation.
However, he predicted that the worst is almost over: “Inflation in the US has been dropping, though as it is measured over 12 months it generally takes 12-18 months for economic activity to react after financial tightening. 2022 has been a very difficult, very corrective year, with the first half dominated by inflation, and the second half reflecting reduced growth.
“We expect economies around the world to start reflecting a sustainably lower inflation rate sometime in 2024, to account for the adjustment period.”
Staying invested has been crucial
Craig Allen, Head of Investment Management for Julius Baer Guernsey, also spoke at the event and updated attendees on investment portfolio performance.
He reported on the fall in value of the Nasdaq’s Composite Index from September 2021 to September 2022, which was around 35%, and drew parallels with the 65% fall witnessed in 2000-2001.
“That was of course alarming at the time, but it eventually recovered and climbed,” Mr Allen said. “History has told us that remaining invested and staying the course is the best way to ride out market turbulence, and that’s what we’ve been advising our clients to do across 2022.”
Some bonds are starting to yield more positive returns and providing opportunities for investors, especially contingent convertible bonds. These are bonds issued by big-name banks that allow those institutions to convert debt to stock under specific conditions.
“Contingent convertibles are currently providing opportunities for clients because the yields are high and banks are currently very well capitalised. Some media headlines would have you believe that we’re in a financial crisis similar to 2008, but we’re not – the best banks are fine. We are in a cost-of-living crisis, certainly, but that’s a very different thing.
“The key for investors over the coming months is to spot the catalysts for recovery; what’s the sign that markets are really starting to recover? Of course, that’s hard to do, and advice should be sought, but that’s the position most investors will currently be in.”
Julius Baer’s Guernsey Market Outlook event was held at the Old Government House Hotel on Wednesday 5 October 2022 for an invited local audience.