Summary
Thematic investing under owned and growing
It has been a difficult year for thematic investing, but the outlook is more bullish. 2022 losers were led by crypto, metaverse, remote work, online shopping, and cannabis. Better performance was seen from energy, shorts, Australia, healthcare, and private equity. Our focus for 2023 is on depressed but growing tech themes, from EV’s to renewables, with valuation relief now on horizon. Whilst old world energy and banking themes and China should not be overlooked.
Lower inflation drives the latest bear rally
Sixth bear rally picked up steam. US inflation fell, easing Fed and recession fear. Q3 earnings drew to positive close. China cut some covid controls. US dollar index fell below 110 and 10-yr yields under 4%, driving tech surge. This offset crypto sell-off and US midterms concern. Saw META and TWTR layoffs, DIS and BYND weak results, and TSLA fell after Musk’s latest big stock sale. See video updates, twitter @laidler_ben.
Seasonality now becomes a strong tailwind
Latest rally supported by earnings, Fed outlook, and now inflation fundamentals, But also by the calendar. November and December have best seasonality on 2023 repositioning.
Mid term election impacts in medium term
Democrat midterm losses gridlock Congress, but ‘Republican tsunami’ did not happen. Is a short term positive, but with medium term risks over debt ceiling or if see deep recession.
The consumer Christmas spending test
Christmas strongest consumer spending of year and most profitable for retailers. US spending growth slowdown from 13% to 7% may be a relief given consumer headwinds.
The China ‘Singles Day’ messages
Singles Day world’s largest $130bn shopping day a big consumer and online challenge.
Crypto asset contagion contained
Crypto assets sharply weaker with bankruptcy of leading exchange FTX. SOL and DOGE led major coin prices down. BTC touched a new recent low of $16,000 before rebounding. Crypto related equities, from COIN to HOOD, also suffered. But broader contagion limited as equities correlation fell to a 2022 low of under 0.5%.
Precious metals see commodity relief
Weaker US dollar and bond yields plus China’ easing of covid restrictions drove commodities, led up by hard-pressed precious metals silver and PGM’s. Energy lagged even as Dec. 5th Russia EU oil import and G7 price cap deadline looms. Cocoa surged on no1 producer Ivory Coast strike and its chocolate industry standoff.
The week ahead: a quieter data week
1) Hope Biden-Xi meet at Bali G20 can stabilise tense relations. 2) UK autumn budget set to plug £50bn ‘hole’ as inflation stays over 10%. 3) US earnings finale includes WMT, HD, LOW, NVDA. 4) The soccer World Cup starts Nov. 20 in Qatar, distracting from financial markets.
Our key views: A gradual U-shaped recovery
Fed risks a policy mistake, with a high-for-longer interest rate outlook even as forward inflation and the growth outlook falls. Lower reported inflation is a relief. Recovery to be gradual and U shaped. Focus on cheap and defensive assets for now like healthcare, and styles like dividend yield, and related markets like UK.
Top Index Performance
| 1 Week | 1 Month | YTD | |
| DJ30 | 4.15% | 13.88% | -7.13% |
| SPX500 | 5.90% | 11.44% | -16.22% |
| NASDAQ | 8.10% | 9.71% | -28.61% |
| UK100 | -0.23% | 6.70% | -0.90% |
| GER30 | 5.68% | 14.37% | -10.45% |
| JPN225 | 3.91% | 4.33% | -1.83% |
| HKG50 | 7.21% | 4.45% | -25.95% |
*Data accurate as of 14/11/2022
Market Views
Lower inflation drives latest bear rally
- Sixth S&P 500 bear market rally picked up steam as US inflation fell more than forecast, easing Fed and recession fears, whilst Q3 earnings drew to a positive close, and China eased some covid controls. US dollar index fell below 110 and 10-yr bond yields under 4%, driving a tech led surge. This offset some contagion from crypto sell-off, US midterm gridlock, and sector concerns. META and TWTR saw big layoffs, DIS and BYND weak results, and TSLA fell after Musk’s latest big stock sale. See Page 6 Resource reports and videos.
Seasonality becomes a strong tailwind
- We are well into fifth bear rally of this downturn. It is supported by fundamentals, from earnings to Fed outlook and now inflation. But also by the calendar. November and December typically have the best seasonality of the year, and 2023 year-ahead repositioning supports this more.
- We can see up to 10 bear rallies before the next bull market. This needs inflation to be much lower and us nearer the Fed cutting rates. But enough has changed to mean the market bottom is in and the market very investable.
Mid term impacts in medium term
- Traditional anti-incumbent sentiment, President’s low approval rating, and inflation concern drove small Democrat losses in US midterm elections. This gridlocks Congress, but the ‘Republican tsunami’ did not happen. This is a small short term positive. Markets have historically rewarded less uncertainty and split government.
- But has potential for medium term pain, from debt ceiling to recession spending. A gridlocked US also loss for Europe, with less leadership on key issues. New Congress sits from Jan 3rd, 2023.
The consumer Christmas spending test
- We are entering the strongest period of consumer spending of the year, and most profitable one for retailers. But this year is a big test. Consumers have been spending down pandemic savings. Inflation is high and turned real wage growth negative. Stock market and housing ‘wealth effects’ have plunged. The support is generational low unemployment.
- The likely result is a halving of Christmas spending growth vs last year, but to still $834 per household. The consumer drives 70% the US economy and is biggest global growth anchor. Discretionary stocks have been some of weakest this year.
China ‘Singles Day’ messages
- China’s 11.11 ‘Singles Day’ started as a small anti Valentines Day and has grown into the world’s largest shopping event. With spending over $130 billion it is now many times bigger than any big US shopping day. This year is set for a spending slowdown, and will be challenging on many fronts.
- 1) For the slow catch up of China’ lagging consumer. 2) To how high 50% online spending penetration can go. 3) And for its struggling tech giants, from BABA to JD.COM, and stock market. It also comes with debate over a possible gradual loosening of China’s unique zero covid strategy.
Seasonality: 50-year median S&P 500 monthly price returns (%)
Crypto contagion contained
- Crypto markets weakened sharply with the bankruptcy of leading exchange FTX with a reported $8 billion funding hole and US DOJ investigation. Bitcoin (BTC) fell to a new recent low at $16,000. Solana (SOL) and Dogecoin (DOGE) posted the largest losses of major coins.
- Crypto related equities from miners to Coinbase (COIN) and Robinhood (HOOD) – where FTX holds a 7.6% stake – were sharply impacted. But broader contagion was limited as the crypto price correlation with equities fell below 0.5% to a new low for 2022, and with the asset class market cap now well below $1 trillion.
Commodities saw precious metals relief
- The Bloomberg commodity index was stable. Easing US inflation pushed the US dollar and bond yields down sharply. Looser China covid restrictions boosted outlook for world’s biggest commodity importer. Greatest impact was on hard-pressed precious metals, led up by silver, platinum, and palladium. ‘Dr. Copper’ also surged higher on the implicit lower recession risks.
- Energy prices lagged even as the December 5th EU oil import ban and G7 Russian oil price cap loom. These will be extended to all Russian petroleum products from February 5th, 2023.
- Cocoa rose to six month high with dockers strike in no.1 producer Ivory Coast and as producers push the chocolate industry for higher prices.
US Equity Sectors, Themes, Crypto assets
| 1 Week | 1 Month | YTD | |
| IT | 10.22% | 10.88% | -28.91% |
| Healthcare | 2.13% | 8.11% | -8.99% |
| C Cyclicals | 6.00% | 4.56% | -29.67% |
| Small Caps | 4.60% | 11.21% | -16.15% |
| Value | 3.85% | 13.11% | -7.16% |
| Bitcoin | -20.93% | -12.16% | -64.89% |
| Ethereum | -23.67% | -1.91% | -66.45% |
Source: Refinitiv, MSCI, FTSE Russell
The week ahead: A quiet data week
- Global leaders meet at the G20 in Bali (Tue) with US president Biden to meet China’s Xi for first time since covid, amidst rising tensions, and immediately after US midterms gridlock.
- The UK autumn budget (Thu) set for £50 billion of painful tax hikes and spending cuts as country faces higher financing costs and seeks to regain credibility as faces long recession.
- US earnings season finale with retailers WMT, HD, LOW, TGT and semis giant NVDA. Also overseas bellwethers from Japan’s SMFG, MFG to Brazil’s NU, Singapore’s SE, and UK’s VOD.
- FIFA soccer World Cup kicks off Sunday, 20th in Qatar, lasting until Dec. 18th. A key distraction from financial markets, with an estimated 3.3 billion viewers tuning in for the last one.
Our key views: A gradual U-shaped recovery
- Fed risks a policy mistake, with a high-for-longer interest rate outlook even as forward inflation and GDP growth outlook falls. Market bottomed but recovery to be U-shaped. Gradually lower inflation will be a bumpy ride but will eventually start to de-risk markets and allow risk assets, from equities to crypto sustainably recover.
- Focus on core cheap and defensive assets to be invested in this ‘new’ world, of higher inflation and lower growth, and to manage still high risks. Sectors, like healthcare, defensive styles like div. yield, and related UK to Japan markets.
Fixed Income, Commodities, Currencies
| 1 Week | 1 Month | YTD | |
| Commod* | -0.52% | 2.83% | 17.86% |
| Brent Oil | -3.03% | 4.70% | 22.86% |
| Gold Spot | 5.25% | 7.51% | -3.08% |
| DXY USD | -4.02% | -6.09% | 10.89% |
| EUR/USD | 3.96% | 6.50% | -8.96% |
| US 10Yr Yld | -34.45% | -20.44% | 230.55% |
| VIX Vol. | -8.27% | -29.67% | 30.78% |
Source: Refinitiv. * Broad based Bloomberg commodity index
Focus of Week: Thematic investing set for a better 2023
It has been a difficult year for thematic investing, but the outlook is more bullish
Thematic investing, with its tech and Growth focus and above average valuations, has had a tough 2022. Interest in investing outside traditional sectors and countries has surged in recent decades but has a long way to go. Thematic funds tripled their share of global equity fund assets in recent years. But it still stands at only 3% versus the 70% of investors that are considering it according to our global retail investor survey.
2022 losers led by crypto, metaverse, remote work, online shopping, and cannabis
The worst thematic performers (see chart) in 2022 among our Smart Portfolios led by Crypto. With Bitcoins 75% plunge, and despite positive ecosystem developments like Ethereum’s merge. Previous highflyers were hit by the post-covid economy normalisation, with slowing work-from-home, online, and payments trends. It was often a double-whammy as high valuations fell sharply as interest rates spiked. Cannabis was hurt as liberalisation expectations under the Democrats US government clean-sweep were dashed.
Better performance from energy, shorts, Australia, healthcare, and private equity
Energy led the best thematic performers this year, with higher-for-longer oil prices and low valuations. Similarly, @AussieEconomy benefitted from commodity prices and the ‘lucky’ country’s profitable banking system. @PanicMode was helped by lower equity prices and renewed interest in shorting strategies. Defensive themes from healthcare to alternatives @Private-Equity were boosted by the investor rotation away from the 2021 Growth and tech favourites to broader diversification and a new focus on Value.
Focus for 2023 on depressed but growing tech themes, with valuation relief on horizon
We see opportunity in tech themes where secular demand is strong but valuations now significantly more attractive. Especially in a 2023 where cyclical growth will fall further but the interest rate peak give some valuation relief. These themes range from EV’s to renewables. Our global retail investor survey showed clean tech most popular (by 33%), followed by digital transformation (27%), and robotics/automation (23%).
Old world energy and banking themes and China are also attractive
Old-world themes from energy (@OilWorldWide) to banking (@TheBigBanks) remain interesting. With high prices, whether oil or interest rates, and the lowest valuations in the market plus strong shareholder focus. China themes are a 2023 wild card over covid policy changes, stepped up economic support, and its move to tech self-sufficiency. After being world’s worst performer in 2022 and with its fate uniquely in its hands.
Select best and worst-performing thematic Smart Portfolios (YTD 2022, %)
Key Views
| The eToro Market Strategy View | |
| Global Overview | The aggressive Fed interest rate hiking cycle and stubborn inflation has boosted uncertainty, recession risk, and hit markets hard. We see this gradually fading, with global growth stressed but resilient, inflation pressure slowly easing, and valuations now more attractive. Focus on cheap and defensive assets for a gradual ‘U-shaped’ market recovery. |
| Traffic lights* | Equity Market Outlook |
| United States | World’s largest equity market (60% of total) seeing slowing but resilient GDP and earnings growth. Valuations led the market rout, and now below average levels, and are supported high company profitability and near peaked bond yields. Fast Fed hiking cycle boosted recession risks. Focus on cash-flows defensives, like healthcare and high dividend. Big-tech supported by defensive growth. See gradual ‘U-shaped’ rebound as inflation slowly falls and de-risks market. |
| Europe & UK | Favour defensive and cheap UK equities (‘Economies are not stock-markets’) over high risk/high return continental Europe. Recession risks high with Russia and energy crisis, threatening to overwhelm ‘buffers’ of rising fiscal spending (defence and refugees), low interest rates (slow to raise ECB), and weak Euro (50%+ sales from overseas). Equities partly cushioned by lack of tech, and 25% cheaper valuations vs US. Favour cheap and defensive UK over Continent. |
| Emerging Markets (EM) | China, Korea, Taiwan dominate EM (60% wt.), and more tech-centric than US. Positive on China as economy reopens, cuts interest rates, and eases tech regulation crackdown. Valuations 40% cheaper than US and market out of favour. Recovery helps global sectors from luxury to materials. Broader EM needs weaker USD and peak US rates catalyst. |
| Other International (JP, AUS, CN) | Canada and Australia benefit from strong equity market weight in commodities and financials, if global growth resilient and bond yields risen. Japanese equities among cheapest of any major market, benefit from weaker JPY and with low inflation, offsetting structural headwinds of low GDP growth, an ageing population, and world’s highest debt |
| Traffic lights* | Equity Sector & Themes Outlook |
| Tech | ‘Tech’ sectors of IT, communications, consumer discretionary (Amazon, Tesla), dominate US and China. Hurt by higher bond yields and above average valuations. But structural stories with good growth, high margins, fortress balance sheets support some. ‘Big-tech’ attractive new recession defensives. ‘Disruptive’ tech is much more vulnerable. |
| Defensives | Core positions as macro risks rise and bond yields are better priced. Consumer staples, utilities, real estate attractive defensive cash flows, less exposed to rising economic growth risks, and robust dividends. Offset impact of higher bond yields. Healthcare most attractive, with cheaper valuations, more growth, some rising cost protection. |
| Cyclicals | Higher risk cyclical sectors, like discretionary (autos, apparel, restaurants), industrials, energy, and materials, are cheap and attractive if see a ‘slowdown not recession’ scenario. Are select but high risk opportunities from energy to financials stocks. With often depressed earnings, cheaper valuations, and have been out-of-favour for many years. |
| Financials | Benefits from higher bond yields, charging more for loans than pay for deposits. Also one of cheapest P/E valuations, and room for large dividend and buyback yields. But is being outweighed by rising recession risks, with lower loan demand and higher defaults. Banks most exposed. Insurance and Diversifieds (like Berkshire Hathaway) least. |
| Themes | We favour Value over Growth on GDP resilience, lower valuations, rising bond yields, under-ownership after decade under-performance. Dividends and buybacks recovering with cash flows. Power of dividends under-estimated, at up to 1/2 of total long term return. Secular growth of Renewables and Disruptive Tech investment themes. |
| Traffic lights* | Other Assets |
| Currencies | USD ‘wrecking ball’ driven by rising Fed interest rates and ‘safer-haven’ bid. Many DM currencies hurt by still low interest rates and struggling growth. ‘Reverse FX war’ interventions ineffective. Strong USD hurt EM, commodities, US foreign earners like tech. But helps big EU and Japan exporters. Stabler USD outlook as near top of Fed cycle. |
| Fixed Income | US 10-year bond yields risen above prior 3.5% peak, as Fed hikes continue aggressively and balance sheet runoff accelerates. Set to ease as recession risks rise and inflation expectations fall. Additionally US has a wide spread to other market bond yields, and structural headwinds of all-time high debt, poor demographics, low productivity. |
| Commodities | Strong USD and rising recession fears hitting commodities. But still above average prices helped by GDP growth, ‘green’ industry demand, supply under-investment, recovering China, and Russia supply crisis. Industrial metals and battery materials well positioned. Oil by slow return of OPEC+ supply and Russia 10% world supply problems. |
| Crypto | In the latest ‘crypto winter’ (16th crash for bitcoin) with dramatic and early asset class sell-off and later specific risk events from Luna to FTX. See long term asset class development with small size under $1 trillion, correlations low, regulation and institutionalization growing, and development continuing – see Ethereum merge to proof-of-stake. |
| *Methodology: | Our guide to where we see better risk-adjusted outlook. Not investment advice. |
| Positive | Overall positive view, and expected to outperform the asset class on a 12-month view. |
| Neutral | Overall neutral view, with elements of strength and weakness on a 12-month view |
| Cautious | Overall cautious view, and expected to underperform the asset class on a 12-month view |
Source: eToro
Analyst Team
| Global Analyst Team | |
| CIO | Gil Shapira |
| Global Markets Strategist | Ben Laidler |
| United States | Callie Cox |
| United Kingdom | Adam Vettese Mark Crouch Simon Peters |
| France | Antoine Fraysse Soulier David Derhy |
| Holland | Jean-Paul van Oudheusden |
| Italy | Gabriel Dabach |
| Iberia/LatAm | Javier Molina |
| Poland | Pawel Majtkowski |
| Romania | Bogdan Maioreanu |
| Asia | Nemo Qin Marco Ma |
| Australia | Josh Gilbert |
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