Insights

Hear from Witan’s managers on what Q1 2023 and beyond could hold in store for markets

Thursday, 15 December 2022

Look at the road ahead, not the flies hitting the windscreen

At Witan Investment Trust we use a multi-manager approach to investment. After a year dominated by geopolitical developments, surging global inflation, rising interest rates and both sad and extraordinary events in the UK, we asked our managers what they see as the opportunities and challenges for 2023. The themes overlap with those that dominated in 2022, as well as some more forward-looking ideas:

1. Energy prices, affecting immediate living standards and corporate margins but accelerating investment to reduce dependence on fossil fuels
2. Peaking Inflation, a slower rise in interest rates and a weaker dollar
3. The reopening of the Chinese economy, allied to wariness over its politics
4. Bearish sentiment and 2022’s focus on macro factors is creating valuation anomalies and opportunities, particularly outside the US
5. The Ukraine war continues to have tragic human costs and widespread economic effects. On the upside, Russian retreat or defeat could be transformative for conditions in 2023

Markets have been shaken by the realisation that central banks were set on raising interest rates to a higher-than-expected peak, to subdue inflation. A stronger dollar intensified global inflationary pressures, increasing the impact of rising dollar-priced commodities.

These risks appear increasingly priced in, while the opportunities are starting to attract attention. Nonetheless, if rates do reach a peak in coming months, the shape is more likely to resemble Table Mountain than the Matterhorn.
The reopening of the Chinese economy is a significant event – its ultimately unsustainable zero-Covid policy imposed significant domestic costs as well as exacerbating global inflationary pressures due to the disruption of supply chains. Businesses selling to Chinese consumers, as well as those reliant on Chinese factories, will see a boost.

The human and economic costs of the Russian war on Ukraine are likely to remain intense, owing to the cold weather peak in energy demand. 2022 has seen coal make an unexpected comeback, due to high gas prices. Despite this short-term setback to decarbonisation, the strategic importance of reducing energy dependence on Russia now pulls in the same direction as the environmental importance of reducing carbon intensity. Investment to achieve these objectives presents a major growth opportunity.

2022 has seen inflation reach 40-year highs and the end of zero interest rates which, combined with pandemic and war, has kept attention focused on macro-level risks. Ironically, economic growth and company earnings have been relatively resilient (though slowing) for much of 2022, while financial markets have delivered volatile and mostly negative returns.

2023 could see the opposite. The surprise may not be that 2023 is a bad year for economies, but that the market focus will shift to recovery prospects, creating a positive outcome for investors. There are sufficient obvious risks to approach this hope with caution, but with sentiment so cautious and many valuations depressed it feels like time to look at the road ahead rather than concentrating on the flies hitting the windscreen.

Below we summarise some of the comments from our managers and their views on the coming year.

Peter Davies, Lansdowne

We are hopeful that H1 2023 should see global investors reappraise the opportunity set in Europe radically. Post Winter, we believe gas prices will begin what we expect to be a long decline back to traditional levels, boosting margins and consumption. USD strength should diminish as interest rate-rises slow and reopening in China boosts exports. Given this backdrop, the exceptional long-term opportunity as a result of distressed valuations and a European capital investment cycle should be better appreciated, allowing exceptional returns. The major risk to this remains the geopolitics in Ukraine, especially if they spread to other energy-producing areas.

Derek Stuart, Artemis

As we enter 2023 sentiment cannot be characterised as anything other than bearish. With limited guidance analysts have forecast a significant recession leading to reduced earnings across most sectors. Whilst this may feel like an unattractive backdrop it sets up the environment for a strong recovery. Inflation is peaking, and with that the pressures on interest rates and margins. Internationally the headwinds of the pandemic are still to fully recede with China re-opening offering higher demand and a reduction in the supply chain issues that have dogged global trade. In time the normalisation of energy prices across Europe will ease consumer cashflow pressures. Through tough times the strong get stronger. Our companies have not been standing still with management actions benefitting their prospects in line with our Special Situations philosophy. From depressed valuations we see the opportunity for our holdings to benefit from this potential recovery.

Lucas White, GMO

Climate change has moved faster than most thought possible and is having a dramatic impact on the world. Economics will drive the transition to a clean energy world, and the climate change sector will experience strong secular growth.

Despite strong performance versus peers and benchmark year to date, we believe the Strategy is well positioned from a valuation perspective to offer significant upside (on an absolute return basis). Geopolitical pressures are likely to continue to aid development in this sector to the extent that the world moves more aggressively to wean itself from its addiction to fossil fuels by transitioning more quickly to clean energy. This transition is not happening in a vacuum and will require tremendous shifts in areas like battery supplies and metal production whilst increasing the demand for clean energy substitutes, such as biofuels. Concurrently, adaptation to climate changes will become an increasing focus for the world and areas like agriculture and water. As opposed to peers who simply concentrate on clean energy, this highlights the benefits of our diversified portfolio. Finally increasing public policy support through initiatives such as RePowerEU and the US Inflation Reduction Act provide further tailwinds, with the effects likely to be felt over many years to come.

Brian Kersmanc, GQG

We are seeing opportunities in India where certain banks are generating what we consider to be attractive returns on assets while non-performing loans are declining. India is also exhibiting double-digit mortgage growth in smaller cities, which we believe is an indicator of sustainable economic growth.

We are currently less constructive on China and Taiwan. We believe when economic activity normalizes in China after the country relaxes its zero-Covid policy, the pace of growth in that country may be slower for longer than investors currently expect. President Xi’s recent consolidation of power may result in an even more unpredictable regulatory environment, in our opinion, while his emphasis on common prosperity may have a negative impact on the profitability of certain businesses. We believe this dynamic reduces earnings visibility. We have also witnessed rising geopolitical tension between China and Taiwan, which we believe elevates the risk profile of both countries.

Mark Baribeau, Jennison

In today’s difficult macro environment, we favour companies that can capitalize on secular growth trends because their profitability is less correlated with the economic backdrop. We’re interested in companies selling products or services that consumers or businesses can’t do without or really need, particularly in the technology arena. We also favour stable growth companies with recurring revenue streams and business that offer good earnings visibility. Companies that capitalize on secular growth trends tend to stand out in uncertain economic environments because they can grow despite economic headwinds. Currently, compelling opportunities exist in electric vehicles, luxury goods, fintech (especially in Emerging Markets), and health care innovation. In terms of risks, we’ve reduced our exposure to China due to its mismanagement of the Covid pandemic and the regulatory environment. We’ve also reduced exposure to areas that rely on mass market demand as well as discretionary health care categories as these types of companies are more vulnerable in an economic downturn.

Michael Lindsell, Lindsell Train

Coming out of the pandemic, our consumer goods companies have thus far proven resilient. Should macro conditions worsen however, any potential recession will likely lead to a more difficult first half of 2023. In such an environment, passing on prices to offset input cost pressures becomes harder as the propensity for consumers to down-trade usually increases. However, ownership of differentiated bands with leading market positions will help them meet these challenges.

On the opportunities side, the easing of travel restrictions should benefit our holdings with exposure here - notably our Japanese cosmetics companies for whom travel retail and mainland China is an important market.

Andrew Headley, Veritas

Challenges in H1 2023 will primarily come from the economic slowdown that is being deliberately engineered by central bankers to bring inflation under control. This will lead to companies in certain industries (in particular those in or related to discretionary consumer spending) seeing revenue and earnings challenged. In addition, if interest rates rise above current market expectations, further derating of equities would likely occur which would disproportionately impact higher growth, higher quality (i.e., more highly rated) companies.

Opportunities generally come from market over-reaction where companies disappoint, and nervous investors sell their holdings at almost any price. It seems likely, given experience in H2 2022, that we will selectively have the opportunity to buy very good quality companies at low valuations that should set the portfolio well for performance over the subsequent 3–5-year horizon. Outside this more general opportunity, the recovery in aerospace seems set to continue and we are well placed to benefit from this. 

Mike Trigg, WCM

Some of the biggest challenges facing investors in H1 2023 are likely to include ongoing uncertainty about rates, inflation, and geopolitics, and how those outcomes affect not only the global economy, but also investor behaviour and sentiment in the short term.

The good news is that all this uncertainty around macro factors is likely to create attractive opportunities for the patient, long-term investor. Going forward, we expect greater dispersion in business performance – and ultimately stock performance – within industries. Some companies will navigate the inevitable challenges and emerging opportunities better than their competitors, positioning them up for outperformance over time. We are laser focused on how companies are behaving and acting in amidst this backdrop to set themselves up to be winners in the long run.

Witan Investment Trust plc is an equity investment. Please note that past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise as a result of currency and market fluctuation and you may not get back the amount originally invested.

Witan Discrete Performance*	Q3 2017 Q3 2018	Q3 2018 Q3 2019	Q3 2019 Q3 2020	Q3 2020 Q3 2021	Q3 2021 Q3 2022
Share Price (Total Return)	10.5%	0.3%	-11.2%	34.5%	-11.5%
Net Asset Value (Total Return)	9.6%	1.4%	-6.3%	33.1%	-11.2%
Benchmark (Total Return)**	9.1%	5.4%	2.6%	23.3%	-3.5%

* Total return includes the notional investment of dividends.
** Witan’s benchmark is a composite of 85% Global (MSCI All Country World Index) and 15% UK (MSCI UK IMI Index). From 01.01.2017 to 31.12.2019 the benchmark was 30% UK, 25% North America, 20% Asia Pacific, 20% Europe (ex UK), 5% Emerging Markets. For more information go to www.witan.com/support/legal-information.

This material is a marketing communication issued and approved by Witan Investment Services Limited. This marketing communication should not be construed as constituting investment advice or an offer or a solicitation to buy or sell interests or investments in Witan Investment Trust plc or any other investment. The views expressed herein represent those of the specific fund managers (as at the date of publication) and not those of Witan Investment Services.

No reliance may be placed for any purpose on the information and opinions contained in the newsletter or their accuracy or completeness. No part of this material may be copied, photocopied or duplicated in any form or distributed to any person that is not an employee, officer, director or authorized agent of the recipient, without Witan Investment Services Limited's prior permission. Witan Investment Services Limited is registered in England no. 5272533 of 14 Queen Anne's Gate, London SW1H 9AA.