Blog post by Empower Wealth

Navigating Landing: VanEck’s 2023 Q3 Summary

Please Note: This report was created and provided by VanEck.

During the past quarter, the US government narrowly avoided defaulting on its debt. Like many of the previous 78 times Congress has acted to revise or extend the ceiling, this one came down to the wire. Many market participants thought this time would be different and that the compromises required by the diametrically opposed political parties were a bridge too far. A strong America though has bipartisan support. There should be no need to question US sovereignty.

Seemingly there is also no need to question US mega-caps. They continue to march on. This past quarter, fuelled by artificial intelligence (AI). However, the impressive march of the S&P 500 has not been enjoyed across the market capitalisation spectrum. If you take away seven companies, the S&P 500 has barely moved so far in 2023.

The Fed’s fight against inflation still weighs on markets. The Fed has paused. For now. With long-term inflation still expected to rise, this pause is just that. A pivot in central bank policy may only happen if the order of magnitude changes significantly, i.e. the size of employment numbers and wage growth, or if there is a market event. This is true for both the Fed and the RBA.

The RBA will also need to continue to hike, with wages and house values rising and productivity falling. The fight to eliminate the scourge of high inflation will lead to a slowdown. Or worse.

Market movements during the second quarter have been unpredictable and narrowly focused. Japan and the US have rallied, particularly mega-caps, driven by the excitement around AI that has driven up IT. China and smaller-sized equities have been the laggards. The price of gold threatened to break out on the back of the US regional bank weakness but recently pulled back as the US dollar strengthened.
We have noticed a step-up in private credit appetite, though we think this may not be the time of the cycle to start allocating. The thesis, we think, is based on the credit being higher up the capital structure, but if the underlying assets are weak, or are too concentrated, then a credit crisis may bring to light the illiquidity factor. When investors rush for the exit together, the mark-to-market is compounded. History has shown that investors don’t act rationally in an episode and the murmurings about commercial real estate and CMBS credit spreads could just be the beginning. US office real estate looks dire.

Liquidity is key, not only to be able to exit if needed but to take advantage of opportunities that present themselves. It is one of those things you don’t appreciate until it’s not there.

Beyond an emphasis on liquidity, we continue to think investors should focus on balance sheets and cash flow and avoid highly volatile and speculative assets. We continue to see support for gold. Asset allocation remains key, as prudent investors focus on what is or what can probably go wrong.