If you like variety in your life, 2023 looks as though it will be an interesting year for you. There is a mixed bag of anticipated ‘events/ eventualities’ that will keep most investors on the edge of their seats for much of the year. Keywords and headlines you will continue familiarity with, will include – the War in Ukraine, Inflation, Recession, interest rate increases, property value decreases, Covid variants, geopolitical ‘stoushes’, market volatility, cyber-security risks, electioneering politics from around the globe (including here in Australia), and of course, here in Australia we now know that the Referendum on the question of an Indigenous Voice to Parliament will take place in the second half of the year.
We acknowledge that our ‘outlook’ is not even close to being an exact science. Nevertheless, our framing of the outlook will provide the financial backdrop to the strategic decisions we will take in our recommendations to our invested clients. This will particularly be the case for the first half of the year. It is published again this year so that our readers have an understanding of the philosophy we will apply in recommending investment strategies. Our recommendations will be made in our clients’ best interests, supported with information that makes it clear how, and why, the recommendations have been made, and how they will help them achieve their financial goals and objectives.
We found some consistent themes, but also, some differences in researching the outlook presented by a number of trusted ‘authorities’ for 2023. Before offering a précis of some of the opinions we have found helpful, the following summing up is offered to whet your appetite to read more detail.
The ContinuumFP Summary Outlook 2023 –
In mid-December 2022, we formed a view that the outlook for the coming year might be summarised as follows: “…the outlook for 2023 is very much dominated by inflation globally (moderating but still higher than acceptable), recessions globally (at various intensities and lengths), interest rates (continuing to climb, but at a slower pace), the war in the Ukraine and other geopolitical tensions (China, the Middle East), GDP outlooks globally (lowered – and being further revised lower) – in all, a fairly ordinary year with forecasts that the S&P500 will be at a similar reading at this time next year as it is now…” – and following the research undertaken for preparation of this article, that view is unchanged.
For this year’s update, we have turned to the following Asset/ Investment Managers (JPMorgan Asset Management – JPMAM, Macquarie Investment Managers – MIM, and Vanguard Asset Management – VAM; Russell Investment Managers – RIM, each of which specialise in different strategies), as well as to the World Economic Forum – the WEF (Chief Economists), and Bloomberg – the New York-based research and reporting company.
The Asset Managers provided justification for their respective outlooks (the detail of which we can provide if you are not able to access it directly), and summarised their positions as follow –
JPMAM:
“2023 could be a year of greater variations in economic performance and policy response after the synchronized inflation surge and monetary tightening of 2022. Active management and diversification(1) continue to be important investment principles to restart our investment journey after a year of hurt. We could see a rainbow in our investment landscape in 2023. Being (invested and) ready to capture the moment will be key. (1)Diversification does not guarantee investment returns and does not eliminate the risk of loss.”
MIM:
re Australian equities – “…while there is reason for optimism that both global shares and Australian equities will have a stronger year in 2023, we believe there are short terms risks of market retracement, while the economic impact of restrictive monetary policy continues to unfold.”
re Global Equities – “The economic backdrop facing investors in 2023 means that building resilience into equity portfolios is crucial. … strategies include …fundamental, defensive investing, reflected in the careful selection of individual companies with the right quality characteristics to provide both the strength to withstand negative shocks and long-term growth potential… or …adopt a dynamic approach – shifting a portfolio as market conditions change, to embrace emerging opportunities and manage risk. … The common feature of these approaches … is that they are all active. Simply buying the index may work in broadly rising markets but is less resilient amid elevated volatility and dispersion. On the other hand, these same conditions create opportunities for active investors.” …and
re Fixed Interest – “…we are entering an uncertain macroeconomic environment with the impact from inflationary cost pressures and deteriorating growth likely to lead to weaker fundamentals. … we believe the current fixed income environment offers an array of opportunities, although it requires flexibility and agility to navigate.”
VAM:
“The good news is that Vanguard’s 2023 outlook actually puts us in a better place than where we were 12 months ago from a return expectation standpoint. There are some differences when you start to break down stock (equities) markets versus fixed income markets. … re Fixed Income: Although the volatility is unexpected, staying patient and sticking with your plan is critical. This is especially true for pre-retirees and retirees, who will benefit from greater income generation as part of their more conservative allocations. … and re Equities: Our value framework suggests that stock valuations still don’t reflect current economic realities, so it’s important to proceed with caution. We could continue to see volatility for some time. But we foresee a better outlook for equities, global equities in particular, where our economists believe valuations look a little more reasonable.
These variations are one reason why VAM emphasize the importance of keeping your portfolio diversified. This could mean addressing underweighted and over-weighted assets in your sub-allocations.”
RIM:
“Our key asset-class views for 2023:
Fixed income will make a comeback after experiencing the worst year of returns in 2022.
Long-term bond yields should decline moderately as recession risk looms. Our target is 3.3% for the U.S. 10-year Treasury yield by the end of 2023.
Equities have limited upside with recession risk on the horizon.
The U.S. dollar could weaken late in 2023 as central banks start to unwind rate hikes and investors begin to focus on a global recovery.
This could be the trigger for non-U.S. developed market equities to finally outperform U.S. stocks, given their more cyclical nature and relative valuation advantage over U.S. stocks.
A weaker U.S. dollar could also be the trigger for emerging markets to outperform.
Overall, 2023 is likely to be the year of the diversified portfolio, where a traditional balanced portfolio of 60% equities and 40% fixed income does well.”
From the World Economic Forum, the takeout has been –
“Almost two-thirds of economists surveyed by the World Economic Forum expect there will be a recession in 2023. The World Economic Forum Chief Economists Outlook, January 2023 finds that growth prospects remain anaemic and the risk of a global recession is high. The IMF expects around a third of the global economy to enter a recession in 2023 and it has cut its forecast of global GDP for the year to 2.7%. … … the outlook for the global economy is gloomy, with almost one in five respondents now considering a global recession to be extremely likely in 2023… But there is still some room for optimism.
The chief economists (recently) surveyed … expected ‘the outcomes of the latest shocks to have been worse, the impending downturn to be relatively short-lived and the current resilience to form a cornerstone of future recovery.’ (and from one Chief Economist surveyed) ‘In my work, executives and many clients ask how they should prepare for a recession. My answer is that they ought to prepare for recovery. A recession might last nine months, but a recovery could last nine years. Many companies have strong balance sheets and can withstand a recession. Yet, when the recovery ultimately comes, they will need sufficient labour and technology to be competitive in a new post-pandemic environment.’”
From Bloomberg, we extrapolated –
US Recession (by their definition) possible during 2023: Fed looks set to keep any such eventuality a shallow event; and to be relatively short-lived;
The Fed likely to plateau its tightening process when they reach a 5% rate (but there could be a small amount of leeway to that); and some speculation that there could be an interest-rate reduction in 2H2023;
The S&P500 index may not make much progress by year’s end, but there will be volatility with several opportunities for a skilled active asset manager to generate ‘performance’;
The correlation between equities and fixed income likely to revert to the traditional negative status (after a couple of years of positive correlation that has rattled portfolio managers and strategists); portfolios with longer credit duration likely to bear positive return results;
Inflation likely to persist into 2024, but at a decreasing rate.
Our Economic and Markets Outlook 2023
Our clients are looking to achieve a diverse range of financial goals, and the timing of their attainment is also quite variable. The usual goals come from factors such as income, liquidity, capital growth, financial certainty, family circumstances, health – and of course, time availability, to name the most common.
It is also a factor in making investment decisions that the unpredictable features of investment markets – on which financial goal strategies are dependent – is that the most certain headwinds are uncertainty, change and volatility (mild, or extreme).
As we have expressed in previous wealth management articles (published on our website), the factors from the above two paragraphs are why we take the approach we do to the analysis of each engagement we have with clients – and carefully assess the investment risk aversion profile of each client before recommending the appropriately diversified portfolio of investment assets. The asset managers we engage to manage the funds invested by our clients have clear, consistent investment philosophies that are diligently implemented to achieve nominated strategic outcomes.
Bearing in mind that the following comments are general in nature and should not be taken as in any way being certain, we express an expectation that the economic and markets outlook 2023 will be something along the following lines:
Economic outlook –
The USA (globally in excess of 40% of GDP) possibly to experience a short-term, mild recession with ‘official’ interest rates peaking at around 5%, inflation moderating over the year but finishing somewhere in the 3% to 4% range (against the Fed’s targeted 2%), unemployment to remain low, the economy strengthening through 2H2023.
China (globally the second largest contributor to GDP) has recently relaxed its controls over the population regarding COVID-19 and travel is likely to increase – particularly global travel. Interest rate and currency remain under central control and are likely to be mildly stimulative. Renewed economic activity under the relaxed Covid restrictions will possibly see China avoid recession this year.
The EU (globally the third largest contributor to GDP) is the economy most affected by the Russian war on Ukraine with substantial supply chain issues causing energy, food and distribution crises that will almost certainly lead this economic region into recession, continuing inflation (though moderating), higher ‘official’ interest rates, and challenging levels of unemployment.
Emerging Markets (EMs) are the final major sector of the global economy and span regions of Africa, South America, Asia – ex China and Japan, and of Europe (non-EU). The fortunes of these economies are very much influenced by monetary and fiscal policies of the Developed economies (significantly of the USA, China and the EU) and for them the outlook appears to be for recession (though at varying levels, and duration), for stifled growth, continuing but easing inflation, and continuing elevated interest rates.
In summary, factors mentioned in the article above, and in this Economic outlook have led the International Monetary Fund (the IMF) to revise its global economic outlook for 2023, to 2.7% – almost a full percentage point below the long-term average (which would be considered a more healthy position).
Markets outlook –
The following comments are extreme generalisations and the asset classes themselves will no doubt behave differently according to the economy they are traded in, the sector of the economy they belong to, and a number of biases that affect investor’s attitudes to the asset class.
Asset Class
Equities – On a broad market index basis, we anticipate that valuations by the end of 2023 may only be marginally different from the start of the year: any gains will need to be found through dividends, share buy-backs or that ever-elusive market timing (buy low, sell high). We will be satisfied if we can find around 3% for the year from this asset class.
Fixed Income – Being the mixed bag of securities that it is, FI is likely to make a resurgence during 2023, but with some portfolio reworking necessary from the recent short-duration strategy to embracing some longer-duration and careful selection of the security type, its liquidity and prevailing economic conditions, we will be pleased with a contribution to portfolio value of between 1% and 3% from this asset class.
Property – Economic activity, earnings and interest rates all influence this market. Having ridden high for the past several years, we believe that recession, high interest rates and inflation (on the cost of living) will impact this market negatively for 2023 – and will be satisfied if the negative impact on this asset class doesn’t exceed 3%.
Alternatives – the primary assets included in this comment are Infrastructure, Private Equity and Commodities, each of which is quite different and correlate with the other asset classes differently as well. We believe that there will be opportunities in both Infrastructure and Private Equity, but are cautious regarding Commodities. With careful selection of appropriate Alternatives, to a reasoned proportion of portfolios, we would be satisfied with returns from this asset class in the range of 3% to 5% .
Asset performance
Using our outlook ‘satisfaction’ expectations, applied to a fully invested Balanced portfolio (70% Growth assets and 30% Defensive assets), a return of between 3% and 4% for the 2023 year is potentially attainable – but the significant caveat to this, is that being out of the market for even a short time when it is rising, can reduce the potential return on any portfolio.
Commodities, derivatives and financial ‘engineering’ are excluded as market assets as they are adequately used in the trading positions of the relevant ‘traditional markets’ above.
The ContinuumFP Economic and Markets Outlook 2023
There are many ways of delivering an outlook for the economies and the markets around the globe, none of which will ultimately prove accurate. We present our outlook on these matters so that you can have an understanding of the issues to be considered when considering investment policies. We reiterate that this outlook is a general commentary only and no investment action should be initiated on the basis of what is written herein without first consulting with your Continuum Financial Planners adviser.
Your best interests are considered and are uppermost to our recommendations. We will:
- Update the financial information we have regarding your circumstances;
- Review your SMART goals;
- Periodically check your investor risk aversion profile;
- Consider your need for liquidity, for income and for capital preservation; and
- Holistically advise you to the fullest extent that you engage us.
You can access our services by calling our office (07 34213456) or completing the Contact Us form on our website.
(This article has been posted in January 2023 and may be updated from time to time.)
