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News24.com | OPINION | Investing: Preparing for an unpredictable 2023




As investors near the end of one of the most turbulent years in history, Jarred Sullivan reflects on the rollercoaster that was 2022 and delve into our expectations for financial markets heading into 2023.

As investors near the end of one of the most turbulent years in history, we reflect on the rollercoaster that was 2022 and delve into our expectations for financial markets heading into 2023.

Bonds and equities registered poor returns in 2022, providing very little diversification benefit amid a highly uncertain investing environment. The Russia-Ukraine war, a higher-than-anticipated global inflation trajectory, a stark shift in monetary policy communication, China lockdowns and slowing global economic data are among the primary reasons for the unprecedented operating environment.

Stemming the tide of inflation

At this juncture, investors’ focus is almost entirely on the US Federal Reserve’s (Fed’s) monetary policy outlook to determine how swiftly the world’s largest central bank can quell the inflation trajectory. The resultant impact on economic growth and company earnings will likely determine the direction of asset classes in the future.

At the September Federal Open Market Committee (FOMC) meeting, the latest projection material was released. Personal consumption expenditure inflation forecasts were raised yet again throughout the forecast horizon and are projected to come in at 5.4% this year as opposed to 5.2% previously. Gross domestic product (GDP) estimates were lowered to just 0.2% this year from 1.7% previously. Most importantly, however, FOMC members lifted their dot plot projections for 2023 – their key short-term interest rate projections. This is despite the federal funds futures market pricing in interest rate cuts next year amid concerns over economic growth transitioning to a below-trend state. These factors will likely make it difficult to generate returns in both equities and bonds, with the former already enduring a meaningful de-rating year-to-date – i.e., investors want to pay less for stocks per unit of earnings. Meanwhile, the latter has been at the mercy of the Fed lifting the global cost of capital, resulting in an unprecedented global repricing in government bond yields.

Suppressed economic activity?

Our primary concern for next year is whether the resilience of company earnings can be extrapolated into the future. We believe this may prove difficult as fiscal and monetary policy, particularly in the US, will likely be on a restrictive path. In particular, the lagged effect of tightening monetary policy actions will likely begin to filter through to changes in consumer behaviour. Higher borrowing costs for both businesses and consumers will likely suppress economic activity, particularly in discretionary-related areas, as economic agents look to rein in expenditure to tighten their balance sheets and income statements.

According to the latest data on hand, US real average hourly earnings are sitting at -2.8% year-on-year as at end-October 2022. This registers as one of the lowest readings on record as inflation continues to erode consumers’ purchasing power. Similarly, savings rates have plunged to just 3.1% as at the end of September 2022 – levels comparable with the 2008 global financial crisis – as consumers continue to tap into reserves to plug the income deficit. Additionally, households are utilising various credit instruments to prop up short-term expenditure, particularly credit card debt which is currently reaching all-time highs.

These dynamics, combined with a rapid withdrawal of liquidity, are certainly not sustainable and point towards an increasing probability of a hard landing in the global economy as we head into the new year. In the absence of supply-side reform by the US government, particularly in the energy sector, tempering economic demand will likely be the only way to bring inflation back towards the Fed’s desired target of 2%.

Housing market slowdown

The developed world’s housing market is displaying signs of a slowdown, particularly if one looks at the United Kingdom (UK) and US mortgage approval and application data. However, it will take time to filter through to a meaningful moderation in housing prices. This will also be particularly important in the policy context of the US Fed, given that the housing market accounts for roughly a third of the Consumer Price Index (CPI) basket. However, Fed chairman Jerome Powell did acknowledge that activity has been subdued of late and has articulated that active selling of mortgage-backed securities is unlikely in the near future.

Hampered growth expectations

While the Eurozone Central Bank and the Bank of England intend to lift interest rates much further to tame inflation, the Bank of Japan (BoJ) remains on a divergent path. The BoJ’s reaffirmation of its commitment to accommodative monetary policy has put enormous pressure on the Japanese yen. A supply shock in natural gas and soft commodities markets – spurred on by the war between Russia and Ukraine – has severely hampered growth expectations, particularly in the UK and Europe. Consequently, corporate margins and household income statements in these regions will most likely be negatively impacted.

On the emerging market front, China continues to display mixed signals by easing on the monetary policy side, amidst well-contained inflation levels, while lockdowns continue to prevent sustainable recovery in economic growth. At this stage, we remain cautious, although valuations are looking cheap, and we expect opportunities to emerge in the coming months.

Lowering risk

We head into a new year where, currently, we believe that economic growth and company earnings expectations are overly optimistic. We prefer sectors with less earnings cyclicality that are therefore less vulnerable to sporadic changes in the business cycle. We also have a strong US dollar bias which tends to benefit from both tightening global financial conditions and risk-off events – when traders and investors reduce their exposure to risks. The countercyclical nature of the greenback counteracts economic fluctuations, therefore offering better risk-adjusted returns relative to other asset classes in times of heightened uncertainty in the global economy.  At this juncture, we prefer to take less risk.

On the fixed income side, we maintain our underweight duration position amid tightening monetary policy dynamics due to elevated inflation levels. However, once the peak hawkishness of the Fed has been sufficiently priced in by market participants, and inflation is firmly on a downward trajectory, we will be looking to take a more explicit position on the long end of the curve. This will be to reflect a deterioration in growth dynamics that will begin to overshadow inflation fears.

Given the persistent positive correlation between stocks and bonds, we believe raising cash is key at this point in time. 

Jarred Sullivan – Global Multi Asset Investment Strategist at Ashburton Investments. News24 encourages freedom of speech and the expression of diverse views. The views of columnists published on News24 are therefore their own and do not necessarily represent the views of News24. News24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, News24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

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