In a few weeks I’ll be lifting the lid on my fund recommendations for 2023. We call these Tom’s Picks, although we’re not alone in doing that so, unless you’re looking for the best fruit varieties in Southern California or a new smartphone, make sure Google points you to the right Tom.
Selecting the right fund is important. The difference between the best and the rest is wide and there are plenty of fund managers who don’t clear the most basic hurdle of all, beating a cheap tracker fund in their chosen area of the market. Past performance is a guide, but even the best money managers can have extended periods in the wilderness.
But this is arguably not the most important question for an investor. Before you get to choose where to invest there are bigger market questions to ask. The first thing to focus on is The Story. What’s Mr Market going to throw at us in the next year or so? Because in the final analysis it is this, and not whether you choose ABC manager or XYZ, that will determine how you look back on 2023.
The first, unhelpful but true, point to note is that no-one knows. If we did, you wouldn’t be wasting your time reading this and nor would I be writing it. This week I looked back at what I was saying a year ago and while, like everyone else, I could see some of the things coming down the track, I was blissfully ignorant of the one big thing that changed everything in February. The link to Putin’s Picks was broken last December.
While there’s a great deal of uncertainty today, that doesn’t worry me. I’ve no idea how the war in Ukraine will evolve next year. And while I think there will be a recession on both sides of the Atlantic, I’ve no idea how deep or shallow it will turn out to be. I don’t know if there will be an election in the UK. It’s not that important.
All the uncertainty does is make the bull and bear cases equally plausible. Whether you are optimistic or pessimistic about the market outlook in 2023 ultimately comes down to a handful of questions, none of which is really answerable with any degree of confidence. Valuations are cheaper than they were but could certainly get cheaper still. Margins have fallen but who’s to say they won’t tighten further. Sentiment is bad but it’s been worse. None of the things that really matter for investors are binary.
So, in determining The Story for next year, there are a few key questions that we must answer to our own satisfaction, but in the full knowledge a. that we might be wrong, and b. that something is likely to come along to change everything anyway.
The first of these questions is: do I think that the market wants to go up or down? This might sound flaky but anyone who has invested for any length of time will know that the market has a prevailing mood. The rally in June and July and again over the past couple of weeks tells me that the market really wants to go up. It is jumping on the slightest hint that the Federal Reserve is finally ready to turn more dovish. It is champing at the bit. That is a good sign.
Next, do I think the market will get what it is looking for next year? Will inflation turn decisively lower and will interest rates follow. Yes, I think they will. Does the market wait for the dawn to arrive? No, it starts to rise when the sky is just a fraction less dark than it was a moment ago. So, will next year be extremely difficult for households and businesses? Yes. But for investors? I really don’t believe so.
Finally, when in 2023 do I expect things to look up? Again, I’ve no idea. It will be when we least expect it, when it feels most like we are going to hell in a handcart. That’s how markets work. The reason I don’t care is that so many investments have already got to a level where the odds of a decent outcome over, say, a five-year period are now so stacked in our favour that it really doesn’t matter if prices fall further from here in the short run.
When I looked this week, I saw a global smaller companies investment trust that had fallen 50pc in the past two years and stood at a 14pc discount to its net assets. There was a commercial property trust priced 42pc below the book value of its buildings. There are China focused funds at a third of their price just 18 months ago. If not now, then when?