It was a generally positive week for investment markets, as investors focused on individual company performance with the Q4 earnings season gathering pace. Over in the US, there were high-profile earnings misses for Microsoft, and closer to home, while overall performance at Diageo was strong, investors were concerned about slowing sales growth within the all-important North American market.
Next week, the focus once again returns to the macro, with both the Federal Reserve (Fed) and Bank of England (BoE) meeting to set interest rates. Inflation data over recent months has given increased confidence that we are perhaps past peak inflation in most developed economies. Despite this, both the Fed and BoE are expected to increase interest rates over the next couple of months and then keep monetary policy tight until they are confident inflation will return to target levels.
Given the falls seen in most major markets last year, you could reasonably argue that the predicted impact on company earnings from higher rates is already priced into markets to a certain extent. This perhaps overly rosy scenario is certainly not a given. As a result, we would expect further volatility in the period ahead as this story unfolds. Investment markets are, however, forward-looking systems; 2023 could well prove to be a worse year from an economic perspective but still be a better year for investment markets.
One of the pillars of our investment process is that we don’t believe in market timing, or, more accurately, we don’t believe we have the ability to do it consistently over a long period. We would define timing the market as raising or lowering cash significantly based on the prediction of what the market is going to do.
We would also argue that for the genuine long-term investor, being out of the market for any prolonged period is not without risk. For investors who sold during the volatility in early October, they have watched painfully on the sidelines as markets have rallied since. The FTSE 100, for example, has gained roughly 14% over that period. Those who tried to time the market now face the difficult decision of when to redeploy funds.
John Naylor, Chartered FCSI – Head of Investment Committee