By Tim Wishart

We are living through extraordinary times, but the good news is that so far in 2023 asset markets are still (mostly) recovering from the lows of autumn 2022. The bad news is that ‘unpredictability’ and ‘uncertainty’ remain the two most repeated words when discussing the future of financial markets.

But despite the ongoing challenges, there is also plenty of opportunity, and many asset classes present attractive valuation entry points. Indeed, in the case of fixed interest investments, we believe this is the best opportunity in over a decade.

At Adam and Company, we predict gradually slowing economic activity across the developed world, as conflicting forces within the US economy continue to affect the growth rate.

Many developed nations are suffering from inflationary pressures, societal issues, industrial action and political volatility. Europe remains uninspiring but not disastrous, while economic growth in the UK has remained positive.

China’s economic activity is healthier than a year ago, but disappointing when compared with post-pandemic expectations. All is clearly not well there, due to sluggish economic demand globally and the impact on China’s export markets.

Headline inflation rates have fallen recently, so one might think that the central banks are succeeding in quelling inflation – but the underlying dynamics are concerning. Pressures are most keenly felt in the UK, mainly due to a wage-price spiral in an overheating employment market, while the US and China are experiencing disinflationary trends.

We believe inflationary influences will continue to subside, but will that satisfy central bankers? Worryingly, they can’t predict how their efforts will affect inflation or the economy, including the housing market. There is a danger that they might push interest rates too far and send their respective economies into deep recessions.

The European Central Bank and the Bank of England seem committed to greater (and riskier) interest rate increases, which will affect small businesses needing to refinance loans. Although companies worldwide remain hugely profitable compared with history, they are (in totality) no longer growing their earnings, and for sustained equity market gains we need a renaissance in earnings growth.

The results for the first quarter of 2023 from global companies were positive and above expectations, but they still fell year-on-year, and we expect to see further declines in the next two quarters.

The attitudes toward some markets, including China and the UK, remain deeply negative, creating low valuations, while sentiment and valuations are more positive in the US equity market.

At Adam and Company, we have tilted our strategies towards the markets offering fairer value than the US, including the UK, Japan and certain emerging markets. Some industries, such as healthcare and infrastructure, have also been left behind, and we are concentrating on these sectors.

We see the most compelling opportunities in fixed interest: yields are high and it’s possible to make returns on the price at which the bonds were bought. The UK gilt market is still distrusted by international buyers, but we believe this has created an opportunity, and we have started to build our position in gilts.

We are less positive on equities, but don’t currently anticipate a major bond default cycle. We would rather accept the risk of a corporate bond with a good coupon than choose a company with a potentially similar return but much greater risk.

Conclusion Our immediate predictions are that: Central banks will soon stop hiking interest rates ; inflationary pressures will continue to subside ; and economic growth will be low but positive.

If we are right, the recovery in asset prices can continue, even if volatility remains high. We will stay balanced, diversified, and open-minded, and focus on the potential for medium-term returns.

Tim Wishart is head of strategy and development at Adam and Company.