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December 20, 2022

2022 Year-end Review and 2023 Outlook

Christopher T. Battifarano
Christopher T. Battifarano
EVP, Chief Investment Officer
2022-Year-end Review & 2023 Outlook

As 2022 draws to a close, our investment team has spent considerable time thinking about the year ahead and specifically about investment themes and portfolio positioning. In advance of our year end investment newsletter, which will include more depth on these topics, we wanted to share our latest thoughts for 2023 and beyond.

One of the major themes that we’ve spoken about in the past, and we think will continue to play out in the new year is deglobalization. This phenomenon is essentially the reversal of the multi decade effect of globalization, which took hold as a result of heightened global collaboration, post cold war, and saw the migration of the manufacturing of many products from high cost to low-cost regions, largely to Asia. This created a strong deflationary tailwind for many years. The process of deglobalization has been advanced by an increased focus on strategic national interest in the US and elsewhere. This is most clearly evidenced through the recently passed Chips and Science Act. We believe there are certainly other examples of this new paradigm shift as well.

Increased geopolitical tensions, which spiked after Russia’s invasion of Ukraine in February, is a theme that we expect to persist into 2023 and beyond. Evidence that Russia may be targeting other neighbors to its east is well documented and has not gone unnoticed. Both Finland and Sweden have joined NATO to safeguard themselves preemptively against such a strike. And Europe is not alone to growing geopolitical risk. We also see this theme in Asia between North Korea and its neighbors, as well as the increasingly tenuous relationship between China and Taiwan.

High inflation will be remembered as the theme that most clearly dominated headlines in 2022 as it reached 40-year highs earlier this year. We see the rate of inflation abating in 2023, and in fact, believe there is already evidence of this occurring in the most recent inflation reports. Surely, this is owning to the significant double-barreled action on both the fiscal and monetary front to combat this silent tax on wealth.

Lastly, we believe corporations, both within in the US and abroad, will struggle to grow earnings in 2023 as compared to 2022. Obviously, there will be exceptions to this rule, and we are speaking in broad generalities. Unfortunately, one of the side effects of efforts by the US Fed to quell inflation is dampening business activity as the cost of capital rises. While this is part of the capitalist business model, recessionary cycles are painful, and business leaders will be forced to make hard decisions while navigating.

In light of these broad themes and our teams view on the forward-looking opportunity set,  portfolio allocations are expressed in the table below.

Guidance Chart

FineMark National Bank & Trust©

We remain overweight cash, owning to that higher-than-normal degree of uncertainty. Within fixed income, we are overweight investment grade credit as higher rates have given way to a more asymmetric risk/reward opportunity set.

Within equities, we are overweight across the board in the US. Outside the US, we are less enthusiastic and are underweight in those markets. Within alternatives, specifically equity long, short and CTA/macro, we are neutral weighted. Those allocations have proven to be a valuable source of diversification in 2022, a year that has proven to be challenging for both equities and fixed income instruments.

Please reach out to your advisor here at FineMark with any questions or concerns. In the meantime, we wish you a very happy holiday season and a wonderful New Year.

We look forward to working with you in 2023.

Have you read our 2022 Q3 Review and Commentary?

Check out Chris’s article here.

Hi. I’m Chris Battarano with FineMark, its year end and we’re thinking a lot about next year and thinking a lot about themes and portfolio positioning. And I wanted to talk to you today a little bit about what our most recent thoughts are for 2023 and beyond. One of the major themes that we’ve spoken about in the past, and we think will be a play going forward, will be globalization or essentially the reversal of globalization, a very strong phenomenon that we’ve experienced for the past multiple decades that has resulted in disinflation across the world, essentially, as goods were produced in lower cost jurisdictions, the costs were easing of those costs, of producing those goods was a positive effect, fact felt by those in developed markets such as the US and beyond. We think one of the results of not just COVID 19, but also the Russian incursion into Ukraine earlier this year has really reoriented the US and other countries to think about production of certain goods in a much more strategic manner. Where we see this most obviously recently is in the semiconductor space. We believe we’ll start seeing this in other industries as well, and that will bleed through the economy. Another theme that I’d like to talk about briefly is increased geopolitical tensions. Again, the incursion of Russia into the Ukraine in February, which shattered 70 years of peace in Europe, has really completely changed the global landscape. And we think that this is something that will persist in 2023 and beyond and where we’re very attuned to it and to those risks. A common theme that we talked about in 2022 that we do think will reverse is inflation. So, 2022 is the year of record setting inflation, rates of inflation that we’ve not seen in 40 years. We believe both the cuts that we’ve seen on the fiscal side and the massive increases of rates, tightening of monetary policy and the shrinking of the Fed balance sheet is beginning to now and will continue to have the effect of reducing the rate of inflation across goods and services. We think this will be a good thing. And then the last major theme that we see playing in in 2023 is falling corporate earnings. We think that earnings for corporations in 23 will be much more challenging than it was in 22, owing to a couple of major issues. First of all, higher input costs. And secondly, as a result of the Fed fighting inflation, very likely a reduction in overall economic activity, probably in the form of a, we believe, mild recession that will take hold in the new year. Our asset class weightings, in light of these themes is as follows we remain overweight cash owning to that higher-than-normal degree of uncertainty. Within fixed income we are overweight investment grade credit. Given that rates had risen so much this year or said another way, bonds have become so much more attractive given their significant price decline we’ve seen in all of 2022, we’ve moved that to an overweight position where we’re pretty enthusiast stick about valuations in in investment grade fixed income today. Elsewhere in fixed income in high yield and in opportunistic credit, we’re somewhat more sanguine and more of a neutral weight position there. We believe any degradation in the overall economy could present somewhat of a risk there within the spectrum of equities, sort of the tale of two cities. We are overweight across the board in the US, so that is both large mid and small cap owning to the selloff that we’ve seen thus far this year and what we believe to be the market’s ability to look through what will likely be some difficult times ahead. On the on the flip side of that coin, where we’re much less optimistic about international equities and have moved those to underweight positions, both developed markets and emerging markets are at an underweight status currently and then within alternatives, specifically equity long, short and CTA macro. We are neutral there again, both of those strategies have served us very, very well in 2022, in what has been a very challenging year for traditional assets, equities and fixed income. And that diversification has helped us immensely. We will be sure to write more about all this in our upcoming newsletter, which will come out next month. To the extent that you have more questions, please reach out to your advisor here at FineMark. We always enjoy talking about these topics and in the meantime, we wish you a very, very happy holiday season and a wonderful new year in 2023. We look forward to working with you. Thank you very much.
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