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16 Dec 2022 - Hedge Clippings |16 December 2022



Hedge Clippings | Friday, 16 December 2022

As 2022 drags to an end, it's worth taking a backward glance at the year just (almost) gone, if for no other reason than to try to fathom out what's in store in 2023. Hindsight being a wonderful thing, the backward glance is a much easier task than the crystal ball, but let's see how we go.

The year has been dominated globally by two major occurrences - Russia's invasion of Ukraine, and an outbreak of inflation.  Neither were widely anticipated by the vast majority of us, although no doubt political and security analysts perhaps had an inkling of the potential for Putin to upset the order of things.  While the situation on the ground in Ukraine has been catastrophic, the economic effects have impacted the world at large, including a significant increase in energy costs, and as a result inflation. However, inflationary pressures were already building, and even if central banks around the world saw it coming, they were slow to act on it.

Enter COVID - although to be fair 2022 was the third year that COVID-19 had dominated the world, and wreaked its own havoc. The difference this year has been the opening up of the global economy post the COVID induced lockdowns, with the exception of China where XI went in the opposite direction. Supply chain issues, a tight labour market, pent up consumer demand (thanks in part to a massive build up of government support), zero to negative interest rates, and seemingly unstoppable speculative markets all intertwined to create the perfect inflationary storm. As noted above, central banks were generally slow to react with higher interest rates, with the RBA no exception, but equally, not alone in doing "too little, too late".

Looking forward there are some signs that inflation (in the US in any event) may have peaked, but that's largely as a result of oil falling from over US$120 per barrel mid year to circa $70 in December. And the US FED's Jerome Powell made it abundantly clear overnight that a slight dip in inflation in the short term isn't going to change their objective of getting it back into the 2-3% range.

Which brings us to next year. The war in Ukraine shows no signs of ending - so much for a temporary military exercise! A recession in the UK is a forgone conclusion (if not already a reality), and there's a widespread view that the only way US inflation gets back to the 2-3% target is by inducing a recession there as well.  The influential Economist magazine says a global recession in 2023 is "inevitable" and notes that the editors of the Collins English Dictionary have declared "permacrisis" to be their word of the year for 2022. In case you're not familiar with the word, it is defined as an "an extended period of instability and insecurity", which as the Economist notes, "is an ugly portmanteau that accurately encapsulates today's world as 2023 dawns."

A quick Google search of "is a recession inevitable" will give you 6.6m references or links, although time and space (plus the fact that unless you're an economic weirdo you'll get bored after the first few) precludes us from adding any more in Hedge Clippings.

That's pretty sobering language on a global view, but what of our rather large southern portion of the globe? We haven't been immune to inflation, or to most, if not all, the issues noted above.  Of course we have also been on the outer with China, who have their own set of issues to deal with. However, we are, as ever, the "lucky country" even if it might not seem that way, given the events of the past two or three years. As such, there'll always be opportunities, and fund managers and their funds able to make the most of them.

This week we include a video interview with Rob Gregory from Glenmore Asset Management, whose Australian Equities Fund is one of the Top Ten Performing funds over one (7%), three (14%), and five (19%) years in the Equity Long Small/Mid Cap Peer Group, no mean feat given that the Peer Group as a whole has struggled in 2022. As Rob explains, much of his success this year can be attributed to avoiding the pitfalls, as much as picking the winners. You can see the interview below.

Finally, this will be our last Hedge Clippings for 2022, unless we sneak one in next Thursday as a special Christmas treat (!). Thank you for bearing with our views, ponderings, and political biases on Friday afternoons over the past year, and we look forward to catching up again in 2023. In the meantime, best wishes and happiness to you and your loved ones for the holiday season, wherever you may be.

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