Monthly summary – February 2023

Inflation and war once again made the headlines in February. Throughout a dismal 2022, when investors had to accustom themselves to the horrors of war and a steep increase in the price of money, their exposure to risk assets was successively reduced. With a relatively low participation level at the end of the year, the prerequisites were in place for a reversal of fortunes this year. January thus saw a strong equity market rally as the worries of 2022, namely war, interest rates and politics were pushed into the background.

Renewed awakening in troubled area 

In February, however, investors experienced a renewed awakening in the same troubled areas. As a reasonably good earnings season came to an end, focus was again on macro issues in a complex world and worse than expected inflation numbers in the US, as well as in Europe, dashed hopes for a softer monetary policy and resulted in hawkish comments by central bankers.

Continued uncertainty around rate hikes 

The combination of high inflation, surprisingly strong labor markets and resilient consumer demand was interpreted as a sign that a recession could be avoided. That in turn led to fears that interest rate hikes by the Federal Reserve and the European Central Bank would continue for longer and end higher.

Investor sentiment deteriorated 

As investors digested these uncertainties, sentiment deteriorated and positioning was again skewed to the downside. Not least trend following CTA’s, a major swing supplier of flow of funds during the last year, switched back to a negative stance. Many of the large investment banks also reiterated their view that equity markets were too expensive in relation to weakening earnings.

The geopolitical situation also worsened in February. A visit to China by secretary of state Anthony Blinken was cancelled when an alleged spy balloon was detected over the US and subsequently shot down, thereby reducing the prospects of improved relations between the two countries. The unwillingness of China to condemn the war in Ukraine and its indirect support for Russia added to the friction.

Russian aggression continued

The Russian aggression towards Ukraine continued with fierce fighting concentrated on the eastern parts of the country. President Biden, treasury secretary Janet Yellen plus several European leaders visited Kyiv in February. Apart from pledges of additional armaments and financial support for Ukraine, the EU agreed on a 10th package of sanctions against Russia. As the war continued into its second year, the outlook for peace looked increasingly distant.

February experienced a setback 

Even though most equity markets have posted healthy returns so far in 2023, February experienced a setback following an exceptionally strong January. All sectors retreated with materials and energy down the most, while information technology and industrials held up better. All regions fell, although Europe continued to outperform the US. A significant downward movement was noted in Hong Kong after a strong run in the preceding four months.

OUTLOOK

The equity market is struggling in its tentative attempts to grind higher. Inflation continues to disappoint on the upside. The labor markets show no clear signs of cooling to give support to the FEDs ambition to stop further interest rates hikes. Many strategists are concerned that earnings estimates will have to come down as interest rates hikes have their full impact later in the year.

Other sectors in the spotlight

In the meantime, the market is focused on a good overall fourth quarter earnings season with few signs of lower margins and earnings. Generally speaking, the healthcare sector had a quite strong earnings season, with some notable exceptions, and we are now in the final phase of the winding down of Covid-related issues, like extra sales, costs, labor shortages, supply issues and other short-term phenomena. For the tactically oriented investor, the first quarter of the year is usually the slowest quarter for many healthcare companies, but expectations usually take this into consideration. However, other sectors seem to be in the spotlight due to the overall strong economy and the difference will probably be seen quite clearly when companies report in April-May.

Nevertheless, we see the glass as being half full rather than half empty, and we are now increasing our net exposure somewhat. We are buying mid-cap growth stocks where we see interesting risk/reward. We believe that inflation will continue to come down, albeit more slowly than we would like. If this is the case, then it should be enough, not only by us but the broader investment community, to continue to view the sector as being attractive.