In the 2005 film Thank You for Smoking our antihero Nick Naylor is a charismatic lobbyist for the tobacco industry. Nick’s best friends (Polly and Bobby) are also lobbyists, pushing the cause for alcohol and firearms respectively.

The three make up the self-titled M.O.D. Squad, the Merchants of Death, regularly meeting in dive bars to swap stories of their toils in America’s least popular industries. Had the M.O.D. Squad owned shares in their three sectors in 2022, they would likely be toasting their newfound riches as tobacco, defence and alcohol stocks (to a lesser extent) have been one of the few areas of refuge in otherwise grim markets this year. While not a member of the Squad, the oil and gas sector could easily be included on the basis of both its unpopularity and strong performance in 2022.

The last few weeks have provided some solace for those investors who, like ourselves, are not large holders of these sectors (in fact our UK fund only invests in alcohol of the above four) and 2022 is in danger of ending with a positive quarter for equity markets. The pain of 2022 market weakness has been a multi-asset event – i.e. investors across the majority of assets, from UK small caps, to US big tech, to EU corporate debt have felt the heat. It has been encouraging, therefore, that the rally we have seen in Q4 has also been spread across multiple risk assets, adding to the conviction that we are seeing the foundations of a meaningful recovery in markets as we head into 2023.

To pick a few particularly significant market moves, sovereign bonds look to have bottomed in the autumn and the expectation is that central bankers, led by the Federal Reserve, are now through the most aggressive phase of rate hiking and may even look to reduce rates towards the end of 2023 if the much-anticipated recession bites and/or inflation continues to ease. One only need look at how far US house prices have fallen to see the effect that rising rates is having on the ‘real’ economy. Recent UK housing data from Halifax and Rightmove is pointing to the start of similar pain in UK housing – something our new PM will be eager to avoid if possible.

Corporate spreads also appear to be making steady progress in tightening, after spiking to 2020 levels this summer. This will improve financing conditions for corporates after a hiatus on new sterling debt issuance in 2022, giving businesses in need of financing some much-needed respite. The oil price has also quietly come back to levels last seen before Putin’s invasion of Ukraine – a welcome boost to cash-strapped consumers and a fact that the BBC has neglected to mention with the same fervour that they reported the rise in oil prices (just saying!).

On the record of 2022 so far, it would not be a surprise if there was another sting in the tail for markets this year, but we are allowed to hope that the worst is passed and has been priced into asset prices. From a UK perspective, we at last have a government that has some credibility and should provide a stable backdrop as we head into the New Year.

As our friend Marcus Ashworth at Bloomberg said in his commentary on the Autumn Budget:


              ‘Stability may be dull, but it beats the fireworks of recent months.’


The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.

Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.

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