3 Key Investment Themes to Watch as 2023 Unfolds: U.S. Strength, Real Assets, and Japan’s Renaissance

As the final quarter of 2023 rolls in, investors find themselves navigating a complex mesh of geopolitical dynamics and economic challenges. While some fear a US recession, we’re spotlighting three central equity themes that offer hope and prospects for astute investors: the resilient US macroeconomy, the ascent of real assets, and the blossoming opportunities in Japan.

1. The Undeterred US Macroeconomy

Exhibit 1: An Employed Consumer Continues to Spend

The inflationary shadow, long predicted as the doom-bringer for the US economy, has proven to be less menacing than anticipated. Key factors like a tight labor market, a robust spree in consumer spending, and strength in multiple economic sectors have not only fueled inflation but have concurrently been bulwarks of economic activity. Nonetheless, any reversal in job trends or dwindling consumer confidence might usher in a conservative spending attitude, potentially easing these inflationary tendencies.

Exhibit 2: A Less Expensive Entry Point for More Potential Upside

Notably, the surge in growth stock valuations is reminiscent of past highs, typically signaling meager forward returns. In our perspective, it’s the long-term interest rates that influence economic fortitude, more than their short-term counterparts. And these long rates have remained near historic lows, despite some hikes in the recent past.

2. The Revival of Real Assets

The anticipated upsurge in infrastructure expenditure echoes positively for the global and US economies and, by extension, value investors. With initiatives from the US, Europe, and Japan focused on boosting infrastructure and reshoring, the future looks promising.

Exhibit 3: Construction Spending Booms

While the financial flow into these projects has only just begun, a subsequent rise in construction and manufacturing activity is predicted. This should bolster the economy and benefit companies entrenched in sectors like mining, aluminum, and construction equipment. As we gaze into the future, it’s clear that entities aligned with building materials, manufacturing, and related sectors will experience a surge in demand.

Exhibit 4: …Providing an Opportunity for Value Stocks

3. Japan: The Sleeping Giant Awakens

Shifting our gaze eastward, Japan emerges as a treasure trove of undervalued investment opportunities. Propelled by an economy teetering on growth and modest inflation, Japan’s corporate sector is undergoing a renaissance. Historically, Japanese firms offered enticing P/B values in the ’80s, but the momentum petered out over subsequent decades. Today, with a more adaptable younger managerial cadre, there’s a renewed emphasis on corporate reforms and equity returns.

Exhibit 5: Japanese Companies are Focused on Improving Price-to-Book Value

Japan’s aging demographic means labor expansion is challenging. This societal realization is forcing the nation to recalibrate its strategies. To fund an extensive gamut of services – from social insurance to healthcare – Japan needs to boost its capital base returns. Thus, fundamental alterations in business operations and the broader economy are imperative.

Exhibit 6: An Aging Population Means a Need for Increased Business Dynamism

Our investment strategy in Japan is straightforward: We’re eyeing undervalued firms with global growth prospects, helmed by progressive managements amenable to engagement.

In Conclusion

The latter half of 2023 could remain unpredictable, with geopolitical shifts and central bank maneuvers potentially steering market volatilities. However, such dislocations might be blessings in disguise, offering golden opportunities to acquire prime companies at prices below their inherent value.

In the grand scheme, we’re buoyed by the robust trends in the US economy, escalating real asset investments, and the metamorphosis of Japanese capital markets. As 2023 marches on, we remain optimistic, pinpointing these themes as the beacons for investors. Stay tuned as we unravel more insights and updates in this dynamic financial landscape.