See all the previous BBB Monthly Recaps here.
Jan 2023 Performance +3.8% vs 4.4% benchmark (FTSE All-Share Index)
2022 Performance +12.0% vs -3.4%
2021 Performance +21.6% vs +14.6%
The Macro Environment
Wow, January was a turbo-charged month! Many shares rebounded strongly, much more than the +4.4% FTSE All-Share performance would suggest. It seems like investors have been happy to put inflation, rate rises, recession, war into the rear-view mirror and look ahead.
There are certainly lots of optimism to look forward to. Many inflation drivers are now firmly in the downtrend, especially as the YoY comparisons get tougher over the next few months. Supply chains are “normalising”. Employment rates are still strong globally.
Yet – I am not so bullish on the FTSE market, which is where I play in. I fear that my hunting grounds, FTSE250 and AIM, will continue to suffer, as the UK economy lags behind others this year. While inflation looks like it has turned the corner, I don’t think it will get back to sub 3% anytime this year, given that China has now gone post-COVID. We know what that means; stronger consumption. The Chinese government will also be keen to introduce stimulus, to keep their growth rates going. All that extra demand, will keep prices of commodities and goods high for a while longer. If inflation doesn’t get to sub-3%, I can easily see the BoE rates going to 5%, 6% by the end of the year. Something that the market hasn’t even remotely priced in as a possibility. Especially if the employment rate continues to hold up strongly.
The other big driver, which no-one is talking about now, but really should, is continued chaos in food production globally, and thereby driving another leg up in food inflation. Globally, we should see continued climate volatility, which will cause havoc on crop yields. In addition, because farmers skimped on fertilisers (because of skyrocketing fertiliser prices last year), and general increase in farming costs, there will be less farmed land this year, as well as lower quality farmland. This is not readily captured in any index, etc. Because it has never been a threat before; every year we just assume that crop yields, and crop lands, will continue to rise. But there is a rude awakening to come, in my opinion.
When I look across sectors, everything seems a bit vulnerable…
