Our head of investment addresses what's happening in markets as British investors look for ways to recession-proof their portfolios.
European markets have opened in the red, with the CAC 40 and the FTSE MIB leading the declines. The FTSE 100 is nursing lighter losses with miner Antofagasta (LSE:ANTO) towards the top of the UK index as well as J Sainsbury (LSE:SBRY)’s and Beazley (LSE:BEZ), helping to limit further downside. However, most FTSE 100 stocks are trading lower with Ocado Group (LSE:OCDO) and Sage Group (LSE:SGE) down by more than 3% each.
European indices are taking their cues from a difficult session overnight in Asia and on Wall Street with risk-off sentiment driving the tech-heavy Nasdaq down by 1.5%. It looks like Father Christmas has failed to bring about his much-anticipated Santa rally this year with last week’s central bank bonanza preventing markets from pushing higher. Volumes are also typically much lighter around this time with many traders and investors away for Hanukkah and Christmas, which can exacerbate any market moves in either direction.
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The Japanese yen jumped to a four-month high overnight after the Bank of Japan surprised markets with a change to its policy, widening the band to let long-term yields move by 50 basis points around its 0% target up from the previous 25 basis points. However, it said this was to improve the functioning of the market, rather than being an interest rate hike. Japan has been an outlier in terms of the global shift towards monetary tightening, given its long-standing history with deflation that means the BoJ unlike other central banks, has been welcoming the prospect of some inflation. However, some say that today’s policy tweak could signal the start of an exit from its current strategy. The yen’s rally has punished the Nikkei, which traded sharply lower overnight given its inverse relationship with the Japanese currency.
In China, the People’s Bank of China kept both the one-year and five-year loan prime rates unchanged for a fourth consecutive month, as expected. Although this year China has been easing monetary policy to stimulate its struggling economy, global interest rate differentials have punished the Chinese yuan, preventing the central bank from loosening policy further given the implications for outflows.
So far in 2022, the FTSE 100 is down by 2% outperforming the wider FTSE 250, which is nursing a loss of over 20%. Inflation and rising interest rates look set to continue to be key themes in 2023 alongside a slowing global economy. In 2023, investors will be looking for ways to recession-proof their portfolios with the potential for a higher allocation to government bonds and credit, dividend stocks, precious metals and defensive plays such as consumer staples, pharma, utilities and tobacco stocks.
Many investors remain cautious towards growth stocks such as technology given the uncertain macroeconomic backdrop. 2022 was the year of the King Dollar with the potential for that bullishness to ease off if the Fed pulls back from its aggressive rate-hiking cycle. However, the central bank’s messaging thus far remains that interest rates still need to go higher. China’s economic reopening with the loosening of its Covid restrictions could also be a key theme next year. Although there is still a major risk of further coronavirus outbreaks, which will test the resolve of the authorities in Beijing towards its policy unwind.
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