The noise
- The UK government deficit hit £27.4 billion, the highest figure for December since modern records started 30 years ago. Almost triple the shortfall for December last year (£10.7bn), rising debt-interest payments and the cost of protecting consumers and businesses from the energy-price shock are to blame for expanding the deficit. These worse-than-expected figures are likely to encourage Jeremy Hunt to postpone any significant tax cuts.
- US GDP grew at a 2.9% annualised rate in the final quarter of 2022, beating expectations but down from 3.2% in the third quarter. The mild slowdown indicates attempts to contain inflation without suppressing growth too much are starting to make an impact, although weakening demand among American consumers will send warning signs that a recession could still be on the cards for 2023.
- Asia’s richest man, Gautam Adani, is facing allegations of market manipulation and fraud from US short seller Hindenburg Research. Adani’s corporate empire, which spans across various sectors including shipping, mining, energy and infrastructure, has seen $50 billion in market value wiped following the release of Hindenburg’s report on Wednesday.
The number
Source: Bloomberg, data as at 26/01/2023
The nuance
In the short term, human sentiment has a powerful effect on stock prices. Share price returns can be split into the change in valuation and the increase in earnings power. Over a 1 year period, earnings growth is relatively small being around 6% to 7% per year, while valuation changes driven by sentiment can be plus or minus 40%. Hold for 10 years and the contribution from compounded earnings moves up to 90% while valuation differences remain at plus or minus 40%. Investor focus has shifted starkly this year, optimistically looking for interest rates to decline in the second half of the year despite official statements to the contrary, and expecting any recession to be shallow and short lived. No one can know how sentiment will move next, which is why sensible investors anchor their views towards realistic expectations and patiently focus on the longer term contribution from growing earnings power.
Companies are currently reporting earnings for 2022 and giving guidance for 2023 which is below investors expectations, resulting in continued cuts to full year earnings estimates. Business investment is adapting to the higher cost of capital and consumers should moderate their spending which flows through to lower short term corporate earnings. At the same time, many businesses continue to strengthen their foundations, and the opportunities for productivity gains from A.I. are clear to anyone who has used Chat GPT. 2022 was the year that financial markets adjusted the cost of capital, and 2023 is shaping up to be a year of adaptation for businesses and consumers. How equity valuations move through this process is unknowable but for those with a keen focus on the long term outlook, it should provide some opportunities along the way.
Quote of the week
“I think it’s kind of a cool name”
Graeme Currie
A man called Graeme, aged 34, is calling for more baby Graeme’s, to stop the extinction of the name Graeme. “I think it’s kind of a cool name. I was noticing a lot of younger people had different names and it was like Graeme seemed to be rarer.”
Graeme is one of a dying breed, and was one of seven male names labelled ‘extinct’ by Babbel in a study published last year. Girl names they flagged as going extinct in 2020 included Bertha, Doreen, Mandy and Phyllis, and Graeme believes that such a move away from these names represents a societal shift.
Acknowledging one of the few positives, he admits that “you don’t get confused with other Graeme’s”, as there aren’t many left.
Potentially in the hope of convincing parents to start a revival of older names, Graeme says that “the name Graeme sets you on a good path. I feel the same way with a lot of older names, it sets you out in a certain way.”
Source: Metro