Reflections on 2022 & Looking towards 2023

• 3 January 2023
• Jill Nes

What a year 2022 was!

A tumultuous period for the global capital markets, registering the seventh worst annual stock market returns since 1929 and the worst since the 2008 financial crisis.  It was an often difficult and challenging period for even the most seasoned of investors.

Despite the challenging market conditions, the investment strategy at BMF Wealth was able to outperform most regional & Global indices, with the MSCI World Equity index declining by 14% in AUD terms.

We were very pleased that we weren’t in US Treasuries, and their disappointing performance in 2022, recording a decrease on average of 20% throughout the year. And while our exposure to gold equities faced headwinds from inflationary pressures brought on by the Ukraine-Russia conflict, we remain optimistic about the potential upside in these investments, particularly given the continued accumulation of gold by key players in the East, such as China and Russia.

Our portfolio of selected real estate assets, both domestically and abroad, performed well in the face of the market turbulence, with the US market proving to be a stronger performer compared to the UK.

And finally, we saw inflation and interest rates propel higher due to the unprecedented levels of government and central bank stimulus, exacerbated by the ongoing Covid-19 supply chain disruptions and the Ukraine-Russia conflict, which led to a spike in energy prices. Our investment strategy to opt for conventional “old” energy sources, rather than renewable energy (while preferred), does not have the ability to meet the demands of the global energy market at present, or we anticipate throughout most of the decade.

Internally at BMF Wealth, our business continued to grow, hiring three new employees, and our full complement of staff worked collaboratively from our office at 25 Martin Place, where we’ve been for the last 42 years. We don’t work from home for privacy reasons & for the betterment of staff interaction.

As always, we remain committed to our investment philosophy, maintaining alignment with our clients by owning the same investments within our portfolio that you do.

But as we turn the page on 2022, we wanted to take a moment to look forward at 2023, the state of the economy and what we might see in the financial markets. As you may be aware already, we are facing challenging times ahead, and there is a growing concern of a potential recession on the horizon.

Considering this, we are closely observing the actions of central banks, particularly the Federal Reserve, as they navigate through this uncertain period. Their relentless and aggressive interest rate hikes may have to be re-evaluated or paused, given the overwhelming burden of global debt – both government and corporate – which has become too large to sustain via increased interest payments alone.

In the United States, the magnitude of unfunded liabilities is staggering, reaching an estimated $173 trillion, equivalent to a per capita unfunded liability of $518,000. The federal debt, which stands at $31 trillion, has surpassed the entire GDP of the country and has risen from 35% in 1980, 57% in 2000, to over 100% of GDP today.

As the winds of change sweep across the global financial landscape, it has become increasingly evident that the existing currencies, heavily burdened by excessive debt, are unsustainable and could inevitably collapse.

We predict that a reset is imminent, and that gold will once again play a critical role in the financial system.

Apart from the global debt issues which is causing global currencies to crumble (the USD has lost over 90% of its purchasing power over the last 7 decades) the actions of the USA against Russia in freezing Russia’s gold & USD’s has accelerated the increasingly negative sentiment against the USD as the world’s reserve currency and has contributed to an increasingly positive sentiment effect on gold.

It is likely that 2023 will be a solid foundation for the divergence away from the USD being the main reserve currency with many countries including the BRIC’s (Brazil, Russia, India, China & South Africa) teaming up with Middle Eastern & Emerging countries to own their ‘own’ ‘non-USD’ currency backed partly by gold.

It is our belief that many countries, including the United States, have exceeded their power by recklessly printing money, and this year we expect a resurgence in ‘tangible’ assets, such as gold, silver, commodities, rare earth metals, low-leveraged commercial properties, and value-driven companies that are profitable, dividend-paying, and cash flow positive. The energy sector is also expected to remain in high demand, given the limited supply and increasing need for sustainable energy solutions.

While there is potential for substantial growth in some innovation companies and digital assets, we advise caution in these investments and suggest keeping these positions to no more than 5% of your total portfolio. As inflation begins to decline and unemployment rises, we anticipate that interest rates will also be adjusted accordingly.

This presents an opportunity for distressed debt investments, and we have conducted Due Diligence on a fund that specializes in these types of investments and if you are an investor who would be interested in these opportunities, we would be happy to discuss it with you.  You can reach us any time at our contact form here.

Finally, commodity producers, particularly those involved in silver and copper, as well as aluminium, graphite, and zinc, are expected to see a boost in demand as the electrification of vehicles drives up the need for these essential components.  This will be the result of China’s reopening, and their demand for resources & energy.

To conclude, the economy will have a few difficult months ahead. Markets are forward-looking so they may see the endgame already, that the impact of tightening interest-rates regime has had on both equity & bond markets.

As always, there’s opportunity.

We are approaching peak negative sentiment. The average bear market has had a -34% return and lasts a little over a year, whilst the average bull market returns +160% and lasts nearly 4 years.  The sentiment will change, and when it does, you need to be well positioned for capitalising. Patience pays.

The importance of diversification amongst asset classes & geographies remains paramount.

At BMF Wealth, you can trust in our selected Fund managers & the many varied Custodians & the regular close dialogue we have with them all cannot be emphasized enough.  We believe that it is important to remain calm & focussed for both the short & long-term with ample liquidity. No debt. No derivatives. And owning quality assets.

2023 may be another challenging year, but our style of active management over passive management is essential at these times, and we’ll continue to strive to dodge any bullets, keep on our toes, our heads on a swivel, looking out and after you.

‘We cannot direct the wind, but we can adjust the sails ‘