2022 has been an extremely difficult year for equity markets especially UK mid and small caps. The reasons for this are well known and include slower economic growth in China, the conflict in Ukraine, rapid escalating inflation and the pressure this is putting on consumer spending, the hawkish shift by Central Banks towards higher interest rates and the move from quantitative easing to tightening and more recently political turmoil in the UK.

Looking into 23, although macro-economic conditions remain difficult and likely to become more challenging, there are reasons to be positive. Although corporate earnings are likely to be under pressure, valuations have compressed significantly.

The UK market looks cheap under almost any measure compared to history and other international markets.

Corporate earnings performance remains robust and importantly balance sheets are strong with generally low leverage prevalent. Indeed over half our portfolio by value have balance sheets with net cash. Corporate confidence in their own future is evidenced by rising dividends and a number of companies buying back their own equity. Additionally we continue to see inward M&A transactions from overseas and private equity players.

There are a number of potential catalysts which could help the equity market recover. The first would be a relaxation of the Chinese zero tolerance policy to COVID. Secondly any resolution to the conflict in Ukraine would be very positive for sentiment and also significantly help decrease inflation as oil and gas prices would likely reduce. However there seems to be little progress in this regard. More importantly the market needs clarity on the likely peak in inflation and interest rates, an area where there has been a fairly constant level of disappointment throughout 2022. However there are signs that we are approaching the peak in both these measures. This will allow the equity market to look ahead with more certainty and allow more a considered perspective on equity valuations.