2023 Portfolio Updates – Page 2 – Frame Global Asset Management

Current widespread growth increases the risks that a recession will take longer to materialize, require higher policy rates, and be deeper than was expected. Global downturns are amplified when synchronized. Central banks are approaching the final stage of their tightening cycles. It will take time to ascertain the magnitude of the inflation unwind. While there are signs that global economies are recovering, (healthy balance sheets, modest investment cycles, and businesses that are reticent to shed hard-to-find labor), the lagged effect of central bank tightening across economies risks a more synchronized and deeper downturn.

After volatility in 2022 and mixed earnings results, January was a positive start to the new year, characterized by stronger GDP growth, a slowing pace of inflation, and expectations of reduced rate hikes by the Fed. With this considered, we believe that the economy will not fall into recession in the first quarter. In February, we revised our twelve-month forward outlook for the U.S. economy, pushing out the anticipated recession to the third quarter of 2023. The new Outlook is for six months of Stagnation, followed by three months of Recession and then three months of Stagnation.

The Chinese economy expanded by 3.0% in 2022, the second slowest pace since 1976 amid the impact of Beijing’s zero-COVID policy.¹ China’s annual inflation rate rose to 2.1% in January from 1.8% in December.² Eurozone quarterly economic growth came in at 0.1% in the fourth quarter, down from a 0.3% in the previous three-month period. Amongst the bloc’s largest economies, GDP grew in the Netherlands, Spain, and France, but contracted in Germany and Italy.³ The Euro Area recorded a trade deficit of EUR 8.8 billion in December of 2022, little changed from the previous year.⁴ The Consumer Price Index in the Euro Area decreased 0.4% month-over-month in January of 2023.⁵ The U.S. economy expanded an annualized 2.9% on quarter in Q4 2022, following a 3.2% jump in Q3.⁶ The annual inflation rate slowed only slightly to 6.4% in January from 6.5% in December.⁷ The unemployment rate inched lower to 3.4% in January, the lowest level since May 1969.⁸ Canada posted a trade deficit in December 2022, mainly driven by strength in prices. It marks the second consecutive year of trade surplus, following annual deficits from 2015 to 2020.⁹ Canadian headline inflation fell to 5.9%,in January from 6.3% in December. The downside surprise occurred despite a much larger 1.1% m/m rise in food prices.¹⁰ The unemployment rate in Canada held steady at 5% in January.¹¹

In January, the S&P 500 was up 6.3%, posting its best January performance since 2019. Smaller caps performed better, with the S&P Mid Cap 400 and S&P Small Cap 600 up 9.2% and 9.5%, respectively. Yields declined amid the market’s expectation of a slowing pace of Fed rate hikes. The Canadian S&P/TSX Composite rose 7.4% in January. International equities outperformed the U.S., boosted by a weakening U.S. dollar and China’s reopening. The S&P Europe 350 had its best start to the year since 2015, up 6.9% in January. Mid and small caps did better, with the S&P Europe Mid Cap and the S&P Europe Small Cap up 9.3% and 8.5%, respectively. Thirteen of sixteen countries contributed positively to pan-European equity returns in January. The French market was the best, contributing +1.60%, followed by Germany and the U.K., with 1.27% and 1.10% in turn. The S&P Pan Asia BMI had its best start to the year since 2012, up 7.3% in January.

In February, our optimization process identified portfolio solutions for our Model Risk Thresholds, with the exception of the Conservative Model. With this guidance, we maintained our asset allocation, including the twenty percent cash position across all models. 2022 provided an example of how diverse sources of demand and supply can provide gold with its uniquely stable portfolio-additive performance as gold produced a marginal gain in 2022.

The current economic recovery is unstable, as the synchronized global pressures of demand contraction, supply shock, and weakening expectations prevails. We are currently positioned for a recession in the U.S. in the third quarter. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

Deborah Frame, President and CIO

¹Trading Economics. China GDP. February 10, 2023.

²Trading Economics. China Inflation. February 10, 2023.

³Trading Economics. Eurozone GDP. February 14, 2023.

⁴Trading Economics. Eurozone Trade. February 15, 2023.

⁵Trading Economics. Eurozone Inflation. February 1, 2023.

⁶Trading Economics. U.S. GDP. January 26, 2023.

⁷Trading Economics. U.S. Inflation. February 14, 2023.

⁸Trading Economics. U.S. Unemployment. February 3, 2023.

⁹Trading Economics. Canada Trade. February 7, 2023.

¹⁰Trading Economics. Canada Inflation. February 21, 2023.

¹¹Trading Economics. Canada Unemployment. February 10, 2023.

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. January 31, 2023. Index performance is based on total returns and expressed in the local currency of the index.

2022 was a year characterized by geopolitical tensions, rate hikes, and inflation concerns across regions, with significant losses across asset classes. Oil prices surged in March as the Russia-Ukraine conflict disrupted global oil trade flows, but prices reversed in the second half of the year as recession risks multiplied. The seeds for a 2023 recession were sown with the Fed’s rate hikes that have begun to permeate the economy. The 2023 global growth forecast factors in that the effects of policy tightening are yet to be felt. Recessions in major economies are expected in the first half of 2023 as reductions in corporate earnings in the first quarter continue to lag inflation. In January, we revised our twelve-month forward outlook for the U.S. economy of six months of Recession followed by six months of Stagnation to three months of Recession followed by nine months of Stagnation.

China reversed its policy on zero-COVID, brightening the prospects for the world’s largest economy in 2023. The Chinese economy expanded 2.9% year over year in Q4 of 2022, following 3.9% growth in Q3. For the full year of 2022, the economy grew by 3.0%.¹ China’s annual inflation rate rose to 1.8% in December from November’s eight-month low of 1.6%.² China’s surveyed urban unemployment rate declined to 5.5% in December 2022 from November’s six-month high of 5.7%.³ China’s trade surplus dropped as exports plunged 9.9%, the largest decline in nearly three years, while imports fell at a softer 7.5%.⁴ The economic outlook in the Euro Area worsened, amid lower growth and higher inflation. Imports climbed by 20.2% while exports rose at a softer 17.2%. The trade deficit widened sharply with Russia and China.⁵

The U.S. economy expanded an annualized 2.9% in Q4 2022, following a 3.2% jump in Q3, rebounding from two straight quarters of contraction.⁶ The U.S. trade deficit narrowed to $61.5 billion in November of 2022, the lowest since September of 2020.⁷ The annual inflation rate in the U.S. slowed for a sixth straight month to 6.5% in December of 2022,⁸ while the unemployment rate in the U.S. dropped to 3.5%, matching the rates seen in September and July.⁹ Canada posted their first trade deficit in 11 months in November of 2022, as exports fell by 2.3%. The sharp decrease in energy prices during the period deflated the sum of foreign energy sales. Imports fell by 2.1%.¹⁰ The unemployment rate in Canada was at 5% in December of 2022, the lowest since the record low of 4.9% in June and July.¹¹

The S&P 500 turned in an annual decline of 18.1%, the worst since 2008. Smaller caps performed relatively better, with the S&P Mid Cap 400 and S&P Small Cap 600 down 13.1% and 16.1%, respectively. Energy gained 65.7%. Dividend and low volatility strategies offered relatively safe harbors. As yields rose on the back of inflation concerns, bonds declined across the board, with heavy losses among Treasuries and corporates. The S&P/TSX Composite fell 5.8% for the year, while Energy was up 30.3%. The S&P Europe 350 shed 3.5% in the final month to finish 2022 with a -8.6% total return. Mid and small caps did worse, with the S&P Europe Mid Cap and the S&P Europe Small Cap plunging 18.3% and 19%, respectively. The heavyweight U.K. market was the brightest spot, contributing 0.33%, while Germany was a major drag, subtracting 2.1% from the S&P Europe 350. Much of the positive return of Gold Billion in December is attributed to a weaker US dollar as other factors such as futures positioning, and rates largely netted each other out. The US dollar index (DXY) fell below its 200-day moving average in the month, for the first time since June 2021. Gold prices posted a small gain in a year when real yields (10-year TIPs) rose an unprecedented 250 basis points and the dollar gained over 8%. Central banks have been buying gold at their fastest pace since the late 1960s in 2022, according to the World Gold Council. It is assumed that China and Russia are major buyers, but there are no official numbers, as not all government agencies disclose their gold holdings.

In January, our optimization process was unable to identify portfolio solutions for any of our Model Risk Thresholds. With this guidance, we maintained our asset allocation, including the twenty percent cash position across all models. 2022 provided an example of how diverse sources of demand and supply can provide gold with its uniquely stable portfolio-additive performance as gold produced a marginal gain in 2022.

The continuing rise in interest rates will produce a wave of debt defaults. Economic and geopolitical catalysts for volatility are in place that are expected to produce both short and long-term market volatility and risk throughout the highly levered global financial system. This foundation of economic recovery is unstable, as the global situation remains complicated and as the domestic pressure of demand contraction, supply shock, and weakening expectations prevails. We are currently positioned for a recession in the U.S. in the first quarter. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

Deborah Frame, President and CIO

¹Trading Economics. China GDP. January 17, 2023.

²Trading Economics. China Inflation. January 12, 2023.

³Trading Economics. China Unemployment. January 17, 2023.

⁴Trading Economics. China Trade. January 13, 2023.

⁵Trading Economics. Eurozone Trade. January 16, 2023.

⁶Trading Economics. U.S. GDP. January 26, 2023.

⁷Trading Economics. U.S. Trade. January 5, 2023.

⁸Trading Economics. U.S. Inflation. January 12, 2023.

⁹Trading Economics. U.S. Unemployment. January 6, 2023.

¹⁰Trading Economics. Canada Trade. January 5, 2023.

¹¹Trading Economics. Canada Unemployment. January 17, 2023.

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. December 31, 2022. Index performance is based on total returns and expressed in the local currency of the index.

February 2023

January 2023