2023 has started strongly in the stock market. The MSCI World index ($SWDA.L) is up +7%, our strategy double that, +14%.
There are both fundamental and technical reasons for the rally.
Fundamentally, US, European and Chinese economic growth has exceeded expectations. Investors were highly pessimistic about global growth last year and were expecting a recession, but the data has surprised on the upside.
Because of a pessimistic fundamental outlook, investors held a lot of cash in October. They have since been deploying some of that cash into equities, in part because the fundamental picture has improved, in part for fear of missing out.
As a result of the rally, individual investors have turned optimistic for the first time since early 2022.
This makes us more cautious about future returns, because the sentiment of individual investors is a contrarian indicator.
However, we are not quite ready yet to sell our stocks.
One reason is that global liquidity is improving, and that tends to support the stock market.
From a sentiment perspective, we feel there are investors out there who hold onto a recession view, and who could be converted to a more bullish outlook if the market continues to rally. There is still cash on the sidelines.
However, we believe a further rally, if it happens, will ultimately prove self-defeating. The reason is that inflation continues to run at a 5% annual pace, too high a level for any central banker to tolerate.
To kill inflation, central banks will have to hike interest rates higher than the market expects, which will cause significant market weakness starting from May this year, in our view.
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Allianz and Societe Generale were replaced by Danske Bank and KB Financial Group.