Building the 2023 investment plan
At the end of each year I like to sit back and think about the key themes that will dominate markets in the coming period. It’s so much about predicting but always staying on our toes as investors, being proactive rather than reactive and thinking about the future before it arrives.
Action is the foundational key for all success - Pablo Piccaso
This time last year, I was thinking about four key topics - climate, food, commodities and disruption. Food and strain on commodities, particularly energy, have been a major investment themes in 2023 which have contributed to inflation exploding and forcing central banks to raise rates.
I didn’t necessarily pick the reason — the European war — but I didn’t need to because I was focused on the factors behind the trigger. My thesis on disruption didn’t really play out to plan, tech stocks have been smashed this year. In hindsight, we did have a tech valuation bubble.
Finally my views on climate were a little less relevant this year because of the energy crunch, but I still believe it’s a major investment theme to watch and perhaps one which will take a little more time to play out. I wrote about the revolution in green technology last week and China’s role in helping the world transition. An important read to set the context for the next year.
What are the key themes in 2023?
My four key themes haven’t changed, but I’ll rephrase them slightly. I think China, Energy, Gold and Food will remain the key investment drivers for 2023. China’s opening up will be a major growth factor particularly at a time when the US, UK and Europe are slowing down due to rising rates. There are some early signs that inflation is being contained, I write about these regularly in my Quicknotes section.
The rate of inflation will gradually start to come down in 2023 and the market is already starting to make adjustments. Take for example US 10 year bond yields which peaked a couple of months ago and are now starting to trend lower. I think the US 10 year bond yield will settle near 3% and stay there for a while as the Fed works through its pivot.
I don’t believe the US will have a hard recession, the economy will weaken, but I don’t think we’ll see a disaster. Things will balance out, good times must be followed by a little pain. No pain, no gain.
The world’s attention is flowing back to China and in the next few months my focus will be a lot more on China’s gradual opening and next decade of growth. What many people seem to miss is China’s reason for handling the pandemic is driven by many unique domestic health realities. It's complex, but working itself out.
China’s balancing out of US and European weakness will add more pressure to Energy, my second theme. I know that oil prices are coming back, but I don’t think we’ll see a slump like we did in the pandemic. Energy fundamentals changed, not just cyclically, but also structurally in 2022. The European war forced the West and the rest of the world to re-evaluate the realit of peak oil and energy supply.
The underinvestment in fossil fuel production, because of green and ESG initiatives which are legitimate, was somewhat masked by the pandemic. We didn’t see the real impact until the world opened back up and was shocked by the events of February.
Peak oil has been around as a theory for some time but I believe it will continue to play out as a reality next year. Any pullback in energy prices will be temporary and I believe the pressure on oil prices will push the world into green solutions at an even faster pace.
That will all put pressure on other industrial commodities too. According to the AFR, Australian Treasurer Jim Chalmers last week flagged the government would become more cautious over foreign ownership of critical mineral resources, saying: “We’ll need to be more assertive about encouraging investment that clearly aligns with our national interest in the longer term.”
Commodities are back in play and I believe we’re in the foothills of the next major mining boom. This one won’t necessarily be driven purely by Asia’s infrastructure rollout, but also the world’s transition towards a solution to peak oil. Australia is probably one of the best placed countries in the world to benefit from this theme, which will intensify in the second half of 2023. Now is the time to prepare.
My third theme is Gold. I can write a lot, but all I will say for now is that the gold price seems like it is too low for too long. Sometimes themes take time to play out in markets. Things can not make sense for a long time. But then, for whatever reason, we see the market reaction. The recent crypto issues and persistent inflation are all supportive for gold. I have it in the model portfolio.
My fourth and last investment theme is Food, particularly inflation around this theme. Food supply and prices are correlated to energy prices and a major cause of inflation and political instability. Peak oil and our energy transition will also mean a food transition like we have never seen. When we think about disruption and entrepreneurship we usually think of Silicon Valley, crypto and artificial intelligence. They’re all legitimate themes, but not the only themes.
Food innovation and disruption is a real theme and investment opportunity. New Zealand is a prime market, as are Canada and Australia. The European war will continue to have a big impact on the global food supply chain and the ramifications will be felt for many years to income. There could be a faster shift and realignment of supply chains, in the same way as energy, coming over the next few months and flowing into 2023.
Countries with agricultural advantages and technology will benefit, including all parts of the supply chain.
In essence macro and thematic investing is about looking forward, through the valley, to anticipate the changes coming tomorrow. As we navigate the market and these opportunities, I invite you to subscribe to get weekly updates as they are published.