Performance Success in 2023 – Active Management, Selectivity and Customization
Transition to a New World Order
2023 has started with the US continuing leading a united Global West, China re-opening and focusing on economic growth, Russia digging in on its illegal military attack on Ukraine and Iran’s regime doubling down on domestic repression.
Stay prepared for more exogenous and endogenous risks and surprises as we are living through a highly challenging and transformative geopolitical environment.
At the same time we are facing structural economic adjustments by changing globalization, energy transition, technological advances, higher defense spending, persistent inequality and deteriorating demographics.
Dominant Macro Themes – China, Russia, Inflation, Central Banks
- The Chinese Communist Party (CCP) being tested and the Chinese leadership threatened by protests against failed COVID policy, economic weakness and property sector decline
- The Global West and NATO staunchly supporting Ukraine against Russia’s illegal military aggression with the objective of restoring multilateral rules and a new and fortified European security order
- Inflation’s paradigm shift is between transitory and entrenched as we haven’t seen a normal business cycle but a mix of unprecedented shocks and policy responses
- Central Banks, led by the FED, prepared to overshooting with restrictive monetary policy to regain credibility and to fulfill their mandates regards inflation and growth
China’s Reopening – The 2023 Game Changer
The Chinese Communist Party finally owned the disastrous and unsustainable no-COVID policy resulting in a clear loss of control for Chinese President Xi Jinping.
China’s approach is now to re-focus on economic growth, business and re-engagement with the West on commercial grounds. The respective positive implications for the global economy and financial markets are hugely relevant.
The way forward to play the unleashing of huge pent-up Chinese consumer demand is either directly investing in Chinese risk assets or to allocate to foreign beneficiaries such as the European luxury&lifestyle&hospitality and export sectors.
Russia’s War in Ukraine in Re-Escalation
The Russian President won’t back down, that much is clear, resulting in re-escalating geopolitical, military, energy and economic confrontations between the Global West and Russia.
Russia, however, is doomed and Putin cornered, facing a determined Ukraine, a united and vastly superior Global West and NATO while China and India remain intent on containing the war to focus on economic growth.
Western sanctions will be ever tightened and reach out to countries, corporates and individuals who have been supporting – and benefitting from – Moscow’s regime by facilitating the circumvention of sanctions. Equally countries and corporates will be increasingly called out who have been hiding their vested business interests behind their neutrality and legalistic arguments.
FED – In Search of Credibility
Central banks, led by the FED, are determined to restore lost credibility, prepared to overshoot. Painful real economic effects of significantly higher interest rates are lagging and, as a result, the corporate and property sectors remain on a challenging trajectory.
Don’t wait for the FED to pivot as this will only happen in a situation in which financial system stability is endangered. The FED will far more likely reduce tightening monetary policy only in line with weakening economic and inflation data.
We expect normalization of monetary and interest rate policy in 2023 which is a much needed and welcome development in the medium- to long-run.
In Quest of Total Return Performance
We are in a macro driven capital market environment characterized by wide return dispersions, whipsawing asset class performances and wild swings in sentiment.
This means that active management, selectivity and customization to respective investors’ profiles re returns, risks and liquidity will be key success factors.
Equities are the major beneficiaries of the next disinflationary cycle which has already started. Consequently, we advocate a steady increase in risk exposures to global liquid and private equity markets.
Investment Favorites – European Luxury&Lifestyle&Hospitality, US Financials and Global Energy
In 2023 long-term holdings in Western high quality and attractively valued multinational firms continue to be attractive and firms with deficient leaderships, uncompetitive products/services and weak financials should be avoided.
Among our favorites are European luxury&lifestyle&hospitality, US financials and global energy in terms of sectors will continue to go strong.
The key performance drivers will be the unleashing of the Chinese consumer and economic turnaround, the topping USD and declining inflation momentum, re-igniting world trade and the improving
emerging markets‘ economic and capital markets outlook.
Key Geopolitical, Economic and Market Risks
We see three key geopolitical, economic and market risks:
- a stagflationary environment with entrenched inflation levels
- financial system instability caused by a major financial accident
- China delivering lethal military equipment and support to Russia’s illegal war on Ukraine
Article by Beat Wittmann, Chief Investment Strategist at Key Family Partners SA