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Annual Outlook 2023 -- We look positively ahead

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Review

When we talk about 2022, we are once again talking about a year that will go down in the history books. Mostly in the negative sense, unfortunately, as the year held surprises on so many fronts that were certainly not expected.

The invasion of Ukraine by Russian troops on February 24 unleashed a war that many in the middle of Europe had thought was no longer possible. Putin’s goal of replacing the government in Kiev with a pro-Russian regime after a few days failed, and the planned “special operation” (Russian wording) turned into a war that is still ongoing.

In the aftermath, a significant weakening of the economic recovery was evident, along with skyrocketing inflation rates. With inflation of 10.4% in October, a level was reached in Germany that was last seen 70 years ago. The price increases were mainly driven by energy costs. Prices for heating oil had more than doubled within a year, and natural gas also rose almost twofold.

Generally, the security of energy supply in Western Europe, but especially in Germany due to the historically built dependence on Russia, became one of the dominating topics at all. The situation shows once again how important diversification is in all areas of life, and Germany would do well to consider lasting and valid alternatives to Russian energy if it does not want to jeopardize its prosperity in the long term over the next few years.

2022 also made history in that virtually all asset classes had to contend with -- sometimes bitter -- losses. Not only shares, also bonds came under the wheels, even the crisis currency gold started after intermediate high flight again the way down. Cryptocurrencies, marketing-technically gladly as inflation protection presented, have virtually pulverized and by the positive correlation to the stock markets, particularly to the US technology exchange Nasdaq 100, exactly this argument clearly refuted.

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The euro also made itself heard with a more than inglorious development and fell both against the U.S. dollar as well as against the Swiss franc below parity, i.e. below an exchange rate of 1:1. This should not come as a great surprise, since the development of a currency is nothing other than a reflection of 1) the economic condition of a region, 2) the confidence in the respective central bank and of course also 3) the political environment. Under all three aspects, the Eurozone cannot really score and from there the Euro weakness was just a logical consequence of what has been happening over the last years.

Performance

Our equity fund ended the year down -6.32% in euros and -10.86% in Swiss francs. This compares to the major indices: the DAX -13.80%, the STOXX600 (Europe) -14.24%, the S&P500 (USA) -18.13% and the MSCI World (global) -17.71% (all values in local currency).

As in all stock market years with violent fluctuations and sometimes high markdowns, our hedging strategy once again protected our investors from harsh losses.

Our bond fund was unable to escape the generally negative trend on the bond markets and ended the year with -17.79% in Swiss francs and -13.60% in EUR, respectively, compared with the Bloomberg Barclays Global High Yield Total Return Index Value Hedged Euro, which ended the year with -13.37%.

After 1931 and 1969, 2022 is only the third year ever that both stocks and bonds have had negative performance, underscoring how extreme this year has been. But where there is shadow, there is also light: throughout 2022, interest payments in our fund were regular, laying the groundwork for another very attractive distribution this spring. Over the past six years, we have always been able to deliver distribution yields of over 4.5% and are confident that we will be able to do so again in 2023.

Current positioning

During Q4 2022, we almost completely reduced our cash position into the rising markets and consequently massively increased our investment ratio. The biggest changes were within the healthcare sector, which was slightly reduced overall on balance. In addition, there were shifts from large pharmaceutical groups to more biotech, which led to a more offensive orientation. We realized gains in energy companies and reduced the sector per se to a neutral weighting. On the other hand, the already existing overweight in commodity stocks was further expanded through additional purchases.

The significant price declines in technology stocks prompted us to increase our investments in this sector and thus reduce our underweight. We also made additional investments in the financials sector, while we kept the weighting of cyclical industrial stocks constant at a neutral level.

High-quality companies will continue to be able to generate profits in 2023, even if the general economic environment becomes more difficult. Solid balance sheets, low debt levels and good market positions are and will remain the main factors in our stock selection. In any case, there is no way around equities as a hedge against inflation.

Our hedging strategies, which were once again helpful in the first half of the year, have largely expired. In some cases, we have rolled positions into the first quarter, so that we will not tackle 2023 without hedging.

Overall, we are more offensively oriented and are gradually discarding the defensive stance that we rightly had for long stretches in 2022. We see many attractive investment opportunities at attractive entry prices in the medium term.

Outlook

For us as asset managers, the question arises not only at the beginning of a year, but rather on a permanent basis, with which complex of topics we have to deal intensively, which trends are beginning to develop and, even more important, which are coming to an end. We constantly and very closely observe political and economic developments in order to develop decisions for our investment policy. This is always done with your assets in mind, which should be invested as profitably as possible, while at the same time being protected as best as possible from market upheavals.

In the current environment, we have a special focus on the following factors:

1) Central banks

The interest rate hikes, not to say interest rate jumps, that took place in 2022 have contributed to a considerable extent to the stock markets being underwater. In addition, they also caused a crash in the bond sector not seen for decades and have thus led to distortions of unimagined proportions. The ECB, FED, SNB and other central banks are walking a fine line between fighting rampant inflation on the one hand and not completely killing the economy on the other.

Why is the interest rate landscape so important? The higher the interest rates on fixed-term deposits, time deposits, bonds and the like, the less attractive the stock market becomes, because there are risks there that a sensible investor wants to see paid for.

In this respect, the further decisions will be of enormous significance. We assume that we have seen the bulk of the interest rate hikes and expect rather moderate activity from the central banks for the year. However, this presupposes a decline in inflation, which seems quite realistic given the easing in energy costs that has begun. Also important in this context are the collective bargaining negotiations, which in the event of massively higher agreements could trigger an unintended wage-price spiral and thus counteract falling inflation.

We believe that after the crash on the bond markets the time has come for investments in bonds. Especially in our Wydler Global Bond Fund there is an unprecedented positive mix of attractive payout on the one hand and enormous upside potential on the other. Not only tactically, but also strategically, a shift into income-oriented strategies is at least worth considering -- especially after the recent recovery of the equity markets.

2) Euro weakness

The U.S. Federal Reserve has taken a much harder line than the ECB in fighting inflation and has tightened its monetary policy much more significantly. As a result, this has led to the euro falling below parity with the US dollar. Companies from the euro zone can still benefit from a weak euro, because it makes their products cheaper in regions such as America or Asia. On the other hand, the permanently weak euro is anything but positive. This is because many intermediate products or components traded in U.S. dollars have to be paid for more expensively, thus leading to an increase in selling prices in the euro zone. The sufferer of this so-called “imported inflation” is the consumer, for whom everything becomes more expensive at the end of the day, and not just in terms of perception.

But where is the euro trending further? Rising interest rates are increasing the solvency problems of heavily indebted euro member states such as Italy (150% debt in relation to gross domestic product), Greece (182%) and Portugal (123%) to an extent that should not be underestimated. But France and Belgium are also problematic cases with debt ratios of 113% and 108% respectively (as of 2022, source: Statista). A complete collapse of the euro would be the worst case scenario, because it would be virtually unaffordable and the majority of Germany’s claims against the ECB would be practically worthless. Therefore, rescue packages as seen in the case of Greece can be assumed, but this would be accompanied by a further loss in value of the euro against other currencies in this world.

Many investors are already diversifying in terms of asset classes, buying stocks, bonds and real estate. So far, so good. However, most of them are still invested exclusively in the euro, although diversification in currencies would also make sense. We consider investments in Swiss francs to be a more than valid alternative, also because we assume that Switzerland will continue to gain in importance and value as a “safe haven” not only because of its regional proximity to Germany.

Summary

In our view, 2023 will continue to be characterized by nervous markets, volatile prices and frequent changes in direction. This requires market participants to have good nerves, combined with a calm but consistent course of action. Ups and downs are part of the game, although we would also like to see a little less of them than last year.

Last year showed us more than clearly how important it is to be broadly positioned. No less important in such turbulent market phases is a well-functioning hedging strategy. However, quality is and remains the decisive factor, because only companies with substance deliver a solid return at the end of the day. Identifying these is our task, and so we will continue to act in your interests this year. 

Thank you very much for your trust,

Best regards

Yours

Thomas Fischer

Managing Director Wydler Asset Management (Germany) GmbH

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