The land of opportunity

Sticking to the script of 2022, December offered up surprises to keep investors on their toes right up to the end of the year. Whilst share markets were weaker, Milford’s diversified funds held on to the majority of their gains of the past few months.

The story of 2022 was the determination of central banks to fight inflation by hiking interest rates significantly. In December, given the large rise in interest rates thus far, coupled with evidence that inflation is indeed slowing, investors had expected central banks to let up on their aggressive hiking intentions. Indeed, whilst the pace of interest rate hikes in the US, Europe and UK did slow to 0.5% increases, central banks surprised markets by indicating that interest rates will have to rise further and stay there for longer.

Whilst more aggressive central bank action doused Christmas spirit in the share markets, we expect investors to start looking beyond central bank actions as we move into 2023. In coming months we will find out how much higher interest rates are already impacting the economy. Furthermore, we will learn how company profits are faring in an environment where wage costs are elevated and companies’ ability to raise prices is becoming tougher.

The turn of the year usually elicits contemplation about the future. However, the future continues to look highly uncertain with a wide range of outcomes that would render any predictions quickly obsolete. Widely held expectations of recession and weaker profits seem logical to us, but we continue to be surprised at how resilient the global economy has been to the shocks of the past year. With risks skewed to the downside, our defensive investment positions remain appropriate. In the past month we have reduced our exposure to the NZ dollar; recent strength is at odds with a weaker relative outlook for our domestic economy.

Higher interest rates will help deliver stronger returns from our cash and bond investments going forward. Although the outlook for shares is more mixed, as active managers we relish the challenge of finding those diamonds in the rough that often emerge in times like these.