Equities

The IMF raised estimates of global economic growth for the first time in a year, expecting 2023 global growth to slow only slightly from 2022 levels, leaving the UK as the only major market to shrink.

By the end of 2022, stock and bond investors alike were ready to put a dismal calendar year in the rear-view mirror. Thankfully, the fourth quarter showed markets advancing once again—setting a more hopeful tone going into the New Year. This was especially true for investors in international equities, as the magnitude of Q4 outperformance (a nearly 10% advantage for MSCI EAFE vs. the S&P 500) gave the asset class its first calendar year “win” relative to U.S. indices since 2017. Foreign currencies regained some of their strength against the dollar, thanks to easing U.S. inflation and less hawkish expectations for the Fed. European markets led on the upside, and with the energy outlook improving considerably the regional positioning was increased from underweight to near neutral. The recession question looms large in 2023, but even though the U.S. economy may hold up better than some in Europe and elsewhere, we believe that deeply discounted valuations and an attractive sector mix make a case for international equities’ continued outperformance.

Q4 performance was generally strong and helped to take at least some of the sting out of a bad year for domestic stocks. Persistent inflation, a hawkish Federal Reserve and a weak economy all combined to make 2022 a period that most equity investors would prefer to forget.

Value stocks were the place to be in Q4 and for the full year, as interest rates remained elevated after rising sharply for the first ten months of 2022, keeping investor time horizons short.

The threat of a weakening economy persists, with the Wall Street consensus putting the odds at 65% for a recession within the next 12 months.  At the same time, valuations, at least for small caps, appear to be discounting a substantial downturn already.

The Bailard Technology & Science Composite (the “Composite”) posted a total return of 1.56% net of fees for Q4, slightly lagging the peer benchmarks’ Morningstar U.S. Open End Technology return of 1.74% and the Lipper Science and Technology Fund Index return of 1.93%. The Composite was in line with the top-heavy S&P North American Technology Index’s return of 1.54%, and outpaced the mega-cap Nasdaq 100 by 1.61% for the quarter. Over longer measurement periods of 3, 5, and 10 years, the Composite’s net returns continue to lead the competitive peer group benchmarks.

Global and U.S. stocks turned in their worst annual results since 2008, as several major central banks abandoned zero interest rate policies with some of the most rapid rate increases in the past thirty years.

Markets welcomed cooler US inflation: October’s US CPI reading of 7.7% year over year was the lowest since January. Inflation continues to run hot in the Eurozone and UK, yet their equity markets managed to outpace the US.

Non-U.S. equity investors continued to be pummeled by geopolitical anxieties and economic forces unseen since the 1980s. Russian aggression may be the proximate cause for a new wave of populism in Western Europe, leading to a far right-wing leader in Italy and a rightward shift in Swedish politics over the quarter. Liz Truss’ disastrous forty-nine days as UK Prime Minister sent shockwaves through global debt markets that led to fears of a GFC-style unraveling. Fortunately, bond yields, which had risen dramatically after her botched tax reform, have largely reverted to previous levels with her ouster. Chinese leader Xi Jinping’s ever-tighter control over his nation’s institutions may mean a more militarist and less mercantilist China moving forward.

Europe led developed markets higher in October, after having led the way down for most of the year. It was welcome relief for beaten down exchanges but probably driven more by expectations for the Fed than by local developments. Europe still contends with record inflation, growth pressures, energy security concerns, and a belatedly aggressive ECB.