Light is Near

Contrary to the positive GDP growth rates in most developed economies, 2022 was challenging for the financial markets. US stocks saw their worst performance since the 2008 global financial crisis. The triple risks of the Ukraine conflict, China’s draconian “zero-COVID” policy and the Fed’s rate increases painted a picture of doom and gloom with forecasts of recession in 2023. Many articles have predicted more pain for the markets this year. Our Valence Global Fund also saw its worst drawdown last year, at -17.45%.  

Recessions are not rare. What is rare is a recession forecast in advance. Stock market bull runs are not rare, too, only those forecast in advance. 

We have adjusted our portfolios to adapt to the inflationary environment for a while now. We managed risk by holding on to companies with strong pricing power, companies that can increase prices without sacrificing much demand. We also looked at companies with fortress balance sheets, loads of free cash flow and minimal long-term debt. And lastly, we like companies that benefit from interest rate hikes – financially sound, well-run banks. 

The key companies we hold are performing well operationally, and we believe stock prices will eventually reflect operational success, despite short-term volatility. We can control our selection but not how the world feels. We know from the sage wisdom of Warren Buffett that human herd mentality goes up and down like drunks on a wild night out. These intoxicated people occasionally sell everything they own, including the clothes they wear, at low prices. Sometimes, they will pay exorbitant prices for the emperor’s new clothes.  

We shall and must hold on to our sobriety. 

We can see the light at the end of the tunnel. Factors that contributed to global inflation are starting to unwind. In the past few years, unregulated crypto trading has added a lot of money to the global financial system. However, with the collapse of FTX, investors may be slowing down their bets on crypto. This will reduce the amount of crypto added to the global financial system over time. 

China is loosening its Covid restrictions now, which will also relieve global supply chain pressures with time. The Ukraine conflict will eventually find a resolution, but the easing of the other two factors will soon reduce the force of inflation. 

That leaves us with the Fed. With a hot labour market, the Fed is taking a tough stance. However, the Fed will eventually have to take a softer view of inflation. Ultimately, if rates rise to 1-2% above the inflation rate, it could crush the global economy, and nothing gets achieved. Hence, with inflation softening eventually, we might see a Fed pivot sooner rather than later. 

Armed with our research knowledge, we are cautiously optimistic about the future. We continue to take a long-term view, believing that human civilisation is on the path of progress, that life will improve, and that products and services that benefit humanity will see more funds flow towards it.