Chris Crawford discusses the opportunities and challenges for 2023 from the unique perspective of a Long / Short Investment Adviser.
What will be the biggest challenge for the year ahead?
The primary challenge we anticipate in 2023 is waves of layoffs at numerous companies, that have overinvested in hiring and expenses, following a period of heavy capital-raising. Now that business plans are proceeding more slowly than expected and capital markets are much harder to access, cash burn will put pressure on companies to cut costs.
Options at these companies are often massively underwater, and employees will now demand cash compensation or repriced options, which would be hugely dilutive to equity holders.
Despite this employment pressure, we also think there remains a non-trivial chance that inflation persists longer and at more elevated levels than consensus expects. Most current investors only know inflation as sporadic, sector-specific, and product-driven.
This time is different: inflation is broader-based and has moved to wages (particularly in the US). Wage inflation is much stickier than product inflation, even with the envisioned layoffs.
What do you think will be the biggest opportunity?
Taking advantage of the multi-quarter, and in some cases multi-year, pullbacks to find solid companies at highly compelling valuations.
Some historic underperformers will undoubtedly still suffer in a general market decline; however, others have sold off so sharply already – or may even have some counter-cyclical characteristics – such that our longer-than-average time horizon gives us comfort to own them at current prices.
Pockets of this type of opportunity exist across many sectors, but we would highlight IT and Energy as two spaces where our disciplined research process is uncovering opportunities for the first time in many years.
What will be the most important trend in 2023?
Consumers pulling back on discretionary spending as their budgets continue to be under pressure from the rising costs of essential items and fears over layoffs, which are increasingly in the headlines and in peer discussions.
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The views and statements contained herein are those of Crawford Fund Management LLC in their capacity as Investment Advisers to the Fund as of 02/12/2022 and are based on internal research and modelling.