Let’s recap quickly what happened this year. Inflation was stubbornly high, and the Fed rapidly cranked up rates to stifle it. The double whammy of higher rates, and higher inflation are wreaking havoc in the economy. The signs of recession are here, we only argue about its intensity and length. The IMF has revised global growth for ‘23 to 2.7%, from 3.2% in ’22.
In markets, things started to improve though. Commodity prices are down from their peak, shipment costs crumble, and labour market loosens. Portfolios are still being weighted in favour of high-dividend-paying blue-chip companies, and low duration investment grade bonds. Those braving higher perils pick up recently-discounted valuations in China, and Tech. Those allocations should benefit from elevated rates, and the continued easing of the post-covid trauma.
Despite the green shoots, the reality will be inanely painful for corporates in 2023. Labour market is bound to remain tight, forcing higher payroll costs onto companies, as the boomers are now exiting en-masse. Labour participation also remains low among the younger generation who are in fully-activated goblin mode. Goblin Mode is “a type of behaviour which is unapologetically self-indulgent, and lazy, typically in a way that rejects social norms or expectations”, as per Oxford Languages. This characterizes a generation, which has been disenchanted by the multiple hickups of the 20th century, no less, that is now shaping up the new collective myths for the 100 years to come:
- low-carbon footprint – how do we reset toward less carbon emissions with no perils to our prosperity?
- local VS global – are global supply chain or global citizen now heretic concepts?
- technology explosion – what are the practical applications of AI and bio-engineering?
- ageing population – is progress in healthcare equally-shared? How do we look our elders in the eye?
- Democracy – do we still believe that democracy is a better path to happiness than self-governance?
We are collectively building solutions in response to these challenges, or are we? The past 20 years have seen the emergence of China, which ideological myths are widely different, and is now vying for the control of the world order with the US. In a nutshell, China controls the world of resources, while the US has a firm grip on money and technology. One can’t do without the other. What gives?
Investing is actually hedging your bets, and 2023 will be no different. I reiterate a few prompts for asset allocation:
- Re-allocate to bonds in short duration and higher quality. High-yield is likely to suffer from deteriorating economic conditions and higher rates. Still wary of duration as debt supply will remain strong, considering the going high rate of subsidy
- In equities, high-dividend paying stocks are a surer hedge against inflation. On tech, the FAAMG that led the last 10 years are bound to transform into holdings, commanding by the sheer size of their cash stack. Investors would be better off chasing innovation and returns at the source in smaller and nimbler companies. The stunning development of Open AI and its chatGPT content-writing product is a case in point. On China, we see equities with potential 15% return.
- Private assets will take a dive. Too much capital has chased these assets lately, crowding valuations. Investors are selling prime assets, as forward price appreciation is low.
- VC will rise again, as a way of getting long innovation. The further democratization of VC investing will make it a growing part of everyone’s portfolio.
Activate goblin mode and win ugly in 2023 !
360 Advisory LLC is a Boston-based RIA managing investments, including crypto