Whitman Q1 2023 Review and Outlook

For what it is worth: Whitman Q1 Review & Outlook

Not a systematic banking crisis

The first three months of 2023 are now behind us and with any luck the rest of the year will be less eventful. There were moments during this first quarter just after the collapse of SVB when it felt like a replay of the Global Financial Crisis. Mercifully, it appears that we are going to avoid a systemic problem, but banks are going to be far more cautious about lending in the quarters ahead.

This might be a headwind for the global economy, which has, despite everything thrown at it, continued to expand.

We sounded an optimistic tone in our 2023 outlook, a position predicated on economic growth remaining better than expected and the fact that everyone was so pessimistic. This has largely played out and financial markets have discounted the better economic news and the fact that we have at least thus far avoided a recession.

The investment environment in the near term is very challenging, and caution is the order of the day. In practical terms this requires a considered deployment of cash into markets, a careful analysis of sentiment and regular communication with clients and their advisers. When markets become fixated on a particular issue like they did in March everything else gets lost in the noise.

In this quarter’s update we focus on three related issues that require attention and that investors have perhaps lost focus of.

Thinking about the world thematically

The cornerstone of our philosophy is that thinking thematically about investment matters maximises the chances that the portfolios we manage for our clients are in approximately the correct places for the long run. Often the big picture themes we talk about are widely understood, one being global security. For example, there is no particular insight on our part to say that we are entering a dangerous time geopolitically but what we instead spend our time thinking about is how the portfolios we mange can either a) benefit from or b) be better diversified against whatever is in question.

Consider for a moment if the internet had existed during the Cold War. How would the United States and the Soviet Union have behaved in that conflict? Perhaps they would have attempted to access the private information of each other’s citizens, disrupt big business computer networks, create online propaganda and misinformation, or cut undersea internet infrastructure cables.

These things happen in 2023 and more frequently than you may think, go ahead, Google ‘internet cables being cut’. We are in a cybersecurity arms race and an old-fashioned one with ships and aeroplanes. Defence investments are a bit of a taboo nowadays, something we always enquire about with clients before investing, but we encounter far less objection to supporting software systems that prevent data theft and general mischief.

What is the outlook for the US Dollar and the Yen

Currency markets are not our area of expertise and as we remind clients, we are the financial world’s equivalent of a General Practitioner, but a recurring message we hear from the experts we speak with regularly are the implications of a weaker US Dollar and a resurgent Japanese Yen.

The Dollar remains the preeminent global currency and has enjoyed a decade or more of relative strength against all the other major currencies. There are several reasons why this is the case, but it is now at a level that have historically heralded a prolonged period of weakness. The Yen has the opposite problem, it is far too cheap. We continue to monitor this situation closely as it relates to Emerging Markets, Japanese companies, and a raft of other important asset classes.

The race to a zero-carbon future and a few thoughts on gold

Gold as an investment is a divisive issue. It has limited uses outside of jewellery production and it pays no income, this alone makes it difficult to love. Nevertheless, since November 2022 it is up about 20% and has recently breached an important price level of $2,000 per ounce. Higher inflation, a situation with the banks, and the general geopolitical issues we have already talked about are responsible for the march up. It is conceivable that these catalysts might prove to be less of a tailwind in the months ahead.

As far as other metals, e.g., Copper, Nickel etc. are concerned we are taking note of an increasingly tight supply coupled with the likelihood of significant demand acceleration as we race with abandon towards net-zero.

Accepting that inflation is not yet behind us, although we are beginning to see the data in this regard get a little better, and that economic growth is perhaps under pressure, we remain optimistic about the prospects for portfolios over the longer term. It is near impossible to call the bottom of a cycle, but we see meaningful advances in the various industries and businesses which we analyse, and these developments should benefit investors.

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