After last year’s historically bad development in global financial markets, 2023 has so far shown itself to be a year in which some trends of the previous year, such as the ongoing increases in central bank interest rates, will continue, but other trends are already reversing strongly: For example, technology stocks are again among the winners of the new year. The Nasdaq 100 Index, which contains many well-known technology stocks, is already up almost 20 % and can make up for a large part of the losses of 2022.
This is mainly because many market participants assume that
the strong interest rate hikes by the central banks and the recent banking crisis will eventually lead to a sharp economic slowdown or even a recession. Hence, they are already starting to discount a future recovery, which will most likely be accompanied by lower long-term interest rates. Add to this the fact that many of the big technology companies are very profitable because of their market dominance. Thus, they are very likely to manage a recession better than companies which are only marginally profitable.
For this reason, cyclical industries, and banks (traditional value stocks), which are normally less profitable, are now in a more difficult position and less sought after than in the previous year.
To the extent that the Nasdaq has rallied in the first quarter,
we also see a notable rebound in our quality managers such as Fundsmith and Threadneedle, which were laggards in 2022 but appear to be relative winners in 2023. This makes sense against the backdrop of a looming recession, as these quality managers also focus exclusively on companies that have high returns on capital with low indebtedness.
Even though global central banks continued to raise their refe- rence rates throughout the first quarter, we can already see that long-dated government bonds have probably already passed their interest rate peaks.
While interest rates for medium- to long-term government bonds rose once again in February, they went into reverse gear in March in connection with the bankruptcy of various American regional banks and the takeover of Credit Suisse by UBS. Again, financial market participants apparently assume that the current banking crisis will lead to a decline in the supply of credit in America and Europe and thereby help to contain inflation, which remains too high. Lower inflation expectations and fear of recession generally lead to a demand for safe government bonds, which is reflected in lower capital market rates at the end of Q1. Only short-term inter- est rates are still pointing upwards in most markets, which can be easily explained by the current high inflation.
A big surprise of 2023 so far is the very good performance of German and European equities. This should be seen against the background of sharply rising central bank rates in ‘Euroland’. Pre- sumably sentiment and valuations were so low at the end of 2022 that a countermovement was necessary.
In January we also saw a strong upward move for equities in China, Hong Kong, and some developing countries. However, this trend has now weakened, and we no longer witness excess returns over global equity indices in these markets at the end of the quarter. The end of ‚Covid 0‘ in China and the low valuations of equities in developing countries, coupled with a weaker U.S. dol- lar, should nevertheless make 2023 a decent year for investments in developing countries.
As 2023 has so far presented itself as a year of recovery, we see positive signs for almost all our investment building blocks, which are especially obvious in our actively managed ‚quality stock components‘ and make them relative winners of the year. Only India, a big winner in 2022, is proving a laggard in 2023.
The badly battered safety (bond) components are also seeing a recovery, which leads us to believe that their lows are already be- hind us. This is well received by our clients. Dimensional Fund Advisor‘s multi-factor portfolio building blocks Portfolio 1 to Portfolio 6, which performed comparatively well in 2022, are also showing good results in the new year. For most of our clients, they are simple and very effective investment solu- tions that we like to highlight.
Since we are moving back into an environment of normalised in- terest rates after the big bond crash of 2022, we have made grea- ter efforts in recent weeks to find safe investment components that have almost no drawdown risk and are de facto safer than regular bank and time deposits. This is mainly because the recent banking crisis in America and Switzerland has made it very clear that not all savings deposits are safe unless the respective go- vernment or central bank issues a corresponding guarantee.
Luckily, there are good alternatives in the money market, hence we have added the modules P5 and P6 to our advisory universe: module P6 is an index ETF that holds global government and cor- porate bonds with a very good rating and a maturity of less than one year. Its current target interest rate is about 5.3 % p. a. and therefore far above the common savings and term deposits.
Module P5 is an index ETF that contains floating rate corporate bonds with a very good rating and a maturity of less than 3 months. The current interest rate path here is more than 4.8 % p. a., which is also considerably higher than widely offered savings and time deposits. Neither of the two building blocks has suffered from any price drawdowns in recent years, which is a good indication of their usefulness as very short-term safety building blocks.
In addition, both building blocks can be bought and sold every day without a fee and are thus very well suited as short-term ‚piggy banks‘. Moreover, they are ring-fenced investments and would NOT be part of a bank‘s liquidation assets in the unlikely event of our partner banks becoming insolvent.
We have deliberately included these components in the adviso- ry universe because we want to avoid clients transferring their savings deposits to dubious savings platforms and exposing themselves to the risk of a bank failure. There are more ideas to consider in global money markets, but we feel that we’re off to a good start with these two new ideas.
Das Family Office relies on a proven and broadly diversified investment approach through specially designed FairHorizons, which combine portfolio solutions and proven investment compo- nents while adapting to the respective investment horizon and the cash flows of an investor: the longer the respective investment horizon of an investor, the higher the advised risk share (equity share) should be. Conversely, risk and volatility should be avoided if short-term investment horizons are in scope and funds need to be kept available quickly.
As an independent fee-based advisor and licensed by MAS (CMS licence), we focus on comprehensive investor education and do not receive any commissions or hidden fees from banks, fund companies or other product providers.
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