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As Soren Kierkegaard said, life must be lived forward, but it is only understood backwards; Continue to improve, learn from mistakes and also enjoy successes.  The best,  without a doubt,  has been to finish  the year in the first quartile of the Morningstar ranking, in all our funds.  The improvement encourages us to continue working to minimize the losses of years as complicated as the past, where assets, for the most part, ended the year with negative returns, more than double digits.  And our hope is to see our funds at all-time highs, once the storm blows up.

Our job remains to find the right value of assets in the face of an uncertain future, but with the conviction that markets will be, and always have been, in the long term, the best way to preserve our capital.  Volatility has dominated markets,  particularly fixed income.  Its cause, unforeseen inflation by central banks. Its consequence, the worst year in the last century for multi-active strategies. And our longing, the likely disinflation this year, which may reverse the trends seen last year.

In 2022, the bond market experienced a large readjustment of interest rates, which were almost at a minimum at the beginning of the year. Central banks began a gradual shift towards tighter monetary policy, but gradualism soon gave way to a more rapid adjustment, when inflation ran fast in the summer, due to rising imbalances between supply and demand, a resilient economy and rising prices of gas and oil due to the war in Ukraine.

If you look at the Federal Reserve, the pace of rate hikes has been the fastest in modern times.  As fixed income investors, we have emerged in the last century with negative double-digit returns in most global indexes. The 10-year US bond ended December with a yield of 3.87% (100 basis points above summer levels and compared to 1.51% in December 2021), while in Europe the yield on the German ten-year bond ended the year at 2.57%, compared to levels of 1.33% in June and close to zero in 2021.

European stock markets have ended the year with single-digit declines in most indexes, while inflation now begins to show signs of moderation. If we analyse the second half of the year, Europe’s profitability was 8.4%, higher than that of the US. This better performance is due to its greater weight of the cyclical sectors, compared to the fall of the large American technology companies. 

The slowdown of economies is a reality. The question is whether there will be a recession, and if there is, whether it will be a mild or deep recession. The combination of disinflation, a mild winter and lower gas demand, with the price falling to September 2021 levels, the probability of a strong recession is less, which the market already discounted in October, and which results in one of the best starts of the year in recent times.

Looking ahead to 2023, we are inclined to think that the next rate hikes will be less intense; that the Federal Reserve will finish the rate adjustment before the ECB; that global economic growth will be divergent, with economies such as China  emerging from recession and others,  entering it;  and that the dollar could depreciate as a result of different monetary policies.  With   weaker economic growth, recession risk and especially falling inflation, bonds, particularly investment grade, should offer a good risk-adjusted return. And don’t be surprised that government bonds and duration are taking a breath after two years of negative yields.

On the equity side, caution in the short term. Macroeconomic data, the publication of results, business margins and above all, the visibility provided by companies, should guide us to the right time to increase risk. China and its reopening, faster than expected, generates a tailwind that makes this year of other stock markets than the American.  In2023, the ingredients for optimism are clear: disinflation and lower exposure to the stock market.  And about taking a stance on the markets, we all know what the market did after February 2009, at a time of such low investment.

We end this letter with three important long-term values that we embody in our work: integration, perseverance and the courage to fight fear. Nowadays, it is increasingly important to analyze the sustainability of companies, which can condemn them to failure if they do not integrate these factors into their business models. Perseverance is key to maintaining a long-term vision and true to your strategy, without volatility changing course.  And as Ralph Waldo Emerson added, “Courage, good conduct, and perseverance conquer all things and obstacles that stand in their way.”

January 2023.