Green shoots for global markets in 2023?

Last year saw a significant adjustment in financial markets, as inflationary pressures ushered in a new era of rising interest rates. Markets also had to contend with sliding economic growth and a squeeze on household and corporate spending. So far in 2023, the outlook still warrants caution, but there are green shoots emerging.

These green shoots are perhaps most evident in Asia. China is reopening as it moves away from its zero-Covid policy. This creates economic momentum across the region, as activity resumes. At the same time, Asia’s post-pandemic debt hangover is not likely to be as severe, with governments remaining more circumspect about spending than their Western peers and inflationary pressures lower. This means the path to recovery appears clearer.

Asian markets

In Asian financial markets, valuations have been hit hard. The region saw a significant bounce in the first month of 2023 as confidence has returned. Gabriel Sacks, manager of abrdn Asia Focus, says: “It has been an exciting start to the year for Asia. Inflation has been relatively benign, particularly in China. Increasingly, there is an expectation that there might be pent-up spending – household savings have increased a lot. This is worth bearing in mind.”

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He admits there are still some reasons for caution. It is still not clear how high interest rates could go and this could impact certain markets, such as India. He adds: “2023 could be a tough year for growth and earnings could also slow. But Asian companies have been more conservative and economies have generally been managed in an orthodox way. This positions Asia well and it should remain the powerhouse for global growth.”

Elsewhere, more caution is warranted. Martin Connaghan, Murray International Trust manager, says the team is still finding plenty of opportunities, particularly in sectors that have been sold off, but remains diversified and defensive: “We have holdings across Latin America, Asia and Europe. The only area we don’t hold is Japan – we have a level of frustration with Japanese companies on their conservative capital allocation. We are well-diversified across industries and sectors, holding energy, consumer staples and telcos. We are underweight those areas that don’t offer high or consistently growing dividends, including the software space of technology and most consumer discretionary companies.

“We’re still quite cautious, particularly after the recent rally. We expect to see S&P 500 earnings at around 3% and sales growth slowing to a similar level. In general, employment has had to drop further before the cycle turns. Activity has fallen, but we need to see unemployment numbers tick up to bring prices under control.”

Stay diversified

Nalaka De Silva, manager of Aberdeen Diversified Income & Growth Trust, is similarly circumspect. He says core inflation is proving persistent and ‘soft landings’ are difficult to orchestrate: “The US Federal Reserve is effectively killing the cycle and we have yet to see where rates peak through this year. The extent of the recession is also unknown.”

The trust is split into three main areas: equity, fixed income and credit, and reduced beta assets, which includes areas such as listed alternatives and infrastructure. De Silva says exposure to private markets brings a long term perspective to the portfolio. He admits there has been some concerns that valuations of private equity holdings do not yet reflect the weaker economic environment. He believes the high yields on offer more than compensate for any potential re-set on valuations. There are also significant discounts on many of the private equity trusts. The fund holds private equity managers rather than making individual private equity investments, which gives greater diversification.

The trust is also looking for opportunities in equities and credit markets as the economic downturn unfolds and value re-emerges. He says visibility of cash flow and inflation protection is important. As such, he has trimmed back non-investment grade bonds and unrated credit, maintaining a weighting in investment grade where there is less chance of default. The fixed income portfolio tends to be shorter-duration, with less exposure to interest rates.

De Silva believes yield is likely to be particularly important in the year ahead, as investors look for stability while capital values remain volatile and uncertain. The fund looks to have a broad mix of income sources, including listed infrastructure, real estate, private infrastructure and private credit. This helps create a stable portfolio of income-generative assets.

There are green shoots in the year ahead, but until there is greater clarity on the turning point for inflation and interest rates, some caution is warranted on financial markets. At abrdn, the focus is on finding assets with reliable, inflation-adjusted cash flows and income.

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Other important information:

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.

Find out more by visiting the Trusts’ websites or by registering for updates.

Murray International Trust PLC

abrdn Asia Focus plc

Aberdeen Diversified Income and Growth Trust plc

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