Outlook Snapshot

Cyan Investment Management

December 2022

As a broad statement, it feels as if the market is in somewhat of a holding pattern. Even the central banks seem uncertain about the economic outlook. For example, in June last year, the governor of the US Fed, Jerome Powell, explained ''I think we now understand better how little we understand about inflation''. 

Further, RBA stated that interest rates would stay low until 2024. It has subsequently increased rates by 300 basis points (bp) with the most recent rise of 25bp taking the cash rate to 3.1%. The tightening of monetary policy has been swift and aggressive, which has thrown equities markets into a spin. 

As stated in our September monthly report: "We believe the most-likely first positive catalyst for a stock market recovery will be a line of sight as to when the interest rate hike cycle will end. Most central banks in developed economies are rapidly and aggressively raising rates. Stock markets hate this. We don't know if this monetary policy strategy will curb inflation as hoped, but an end to this cycle could provide a clear positive catalyst for a shift in sentiment for equities." 

The market is currently consumed by this issue and economists seem to be at the centre of every discussion. 

Gareth Aird, Commonwealth Bank's head of Australian economics, had previously forecast the RBA's rate hike in early December would be the last but he has updated his predictions after the RBA signalled more rate rises. He stated, "The tweak in forward guidance was not as material as we anticipated and as a result, we shift our risk case to our base case....We now expect one further 25 basis point rate hike in February 2023 for a peak in the cash rate of 3.35 per cent". 

Chief Economist at AMP Shane Oliver believes the cash rate has now "peaked" -- with a high risk of one final 0.25 per cent hike to 3.35 per cent in February. By end 2023 or early 2024 he expects the RBA to start cutting rates. 
It does appear we are nearing the end of the cycle so we hope for a shift in sentiment in the relatively near future. That said, at Cyan we invest on a bottom-up fundamental basis where we find individual companies that are small but well positioned in their chosen industry and will provide growth over time and through economic cycles. In our view, all the companies in our portfolio will have materially stronger market share positions in their industry in years to come, irrespective of economic conditions. 

However, that value doesn't get released in a straight line, and we are in the middle of one of those frustrating periods at the moment. But the market is forward looking, so investors waiting for genuine clarity around the economy may well find that the market has already moved ahead of them this year. 

Funds operated by this manager:

Hedge Clippings | Friday, 20 January 2023

Welcome to the first edition of Hedge Clippings for 2023.

Firstly, good riddance to 2022, which for most investors and the majority of fund managers was a year they'd happily forget.

The cause of most of the damage was the sharp increase in interest rates, triggered in turn by an outbreak of inflation, as noted by L1 Capital in their December performance report:

"The dominant theme of the year was the surge in inflation, which reached 40-year highs in the U.S., driven primarily by extreme fiscal and monetary stimulus implemented in 2020 and 2021... The Fed responded with the most aggressive interest rate hiking cycle seen since 1981. Over the year, the Fed raised interest rates by 425bps relative to market expectations of only 75bps at the start of 2022."

The last sentence reveals why so many funds struggled in 2022. No one expected an inflationary break out, thus market expectations - including those of central banks - for rates rises were subdued, to say the least. Throw in the unexpected invasion of Ukraine in February, plus turmoil in China, and it's easy to see why only 29% of the 700+ funds in the FundMonitors database, (including the above mentioned L1 Capital's Global Long Short Fund which returned 9.8%) provided positive returns for the year, and less than a quarter of all equity funds managed to outperform the ASX 200 Accumulation Index.

Put bluntly, central banks, including our own RBA, and economists were caught looking in the wrong direction, and thus fund managers had to readjust to the new environment, which by the last quarter of the year many had managed to do. The ASX fared better than most global markets, falling 1.08% on an accumulation basis, while the S&P500 was down 18%, and the NASDAQ fell 33%. Unusually in times of equity market turmoil, bond markets didn't provide a safe haven.

Looking forward, it seems inflation, while still a major issue, may have peaked in the last quarter of 2022, particularly in the US where it dropped to 6.45% in December, down from 9.06% in June. Meanwhile, in the UK the December annual inflation figure was 10.5%, down slightly from 10.7% the previous month. That may allow central banks to ease off on further rate rises, but we are unlikely to see rates fall until much later in the year, by which time the looming recession will have been confirmed.

So while the path ahead is not going to be easy, and is still uncertain, hopefully, there are less unknowns: The war in Ukraine will drag on, and hopefully not escalate further. China remains a 50/50 bet, although a far cry from the economic and political juggernaut it seemed to be a couple of years ago. COVID, whilst remaining a threat thankfully seems to be receding or at least becoming more manageable.

Of course, thinking that the bad news is already out there is dangerous - the unexpected is always just around the corner. But compared to this time last year, surely markets are more prepared for what might lie ahead?

News & Insights

Market Commentary | Glenmore Asset Management

Market Update | Australian Secure Capital Fund

December 2022 Performance News

Glenmore Australian Equities Fund

Argonaut Natural Resources Fund

4D Global Infrastructure Fund (Unhedged)

Insync Global Quality Equity Fund

Bennelong Long Short Equity Fund

Quay Global Real Estate Fund (Unhedged)

Digital Asset Fund (Digital Opportunities Class)

ASCF High Yield Fund

L1 Capital Long Short Fund (Monthly Class

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