This article first appeared in the Financial Review on 4 January 2023
Last year was a bit of a doozy for retail investors. Wall Street marked its worst year since 2008, with the S&P 500 down nearly 20 per cent by the bitter end.
Down Under, the S&P/ASX200 finished 7.26 per cent lower. And according to the experts, 2023 will see more volatility as central banks attempt to tackle inflation.
Six fund managers share their predictions for investors in 2023.
No new normal yet
Capital Group portfolio manager, Jody Jonsson
Joanna Jonsson invests in equities at Capital Group.
The portfolio manager says investors need to prepare for a range of possible outcomes, flagging persistent inflation as a risk, even as rate cycles reverse.
“Consequently, I’m wary of highly leveraged companies. Money isn’t free anymore, so a larger slice of earnings will go to service debt. And companies able to fund their own growth will remain particularly attractive,” she says.
Additionally, while the last decade has been dominated by internet-related stocks, she sees producers of physical assets receiving more attention.
“I expect broader market leadership to emerge among a variety of companies, which should provide a positive backdrop for stock pickers over indexers.”
We’re going to go sideways
Fidelity portfolio manager, Casey McLean
Casey McLean invests in Australian equities including small caps.
“The recent bear market rally in Australia and the US has seen the market declare victory over the Federal Reserve and the Reserve Bank of Australia. But do not expect rate cuts in 2023,” says Casey McLean, who invests in Australian equities for Fidelity.
Instead, rates will remain in the restrictive zone until they beat inflation, he adds.
While Australia will likely avoid a recession, pressure on consumer spending and dwindling savings will present a downside risk to earnings.
“Remember earnings are nominal and they should peak when inflation peaks. Hence, the focus should be on companies with resilient earnings, normalised inventories, and reasonable valuations,” says McLean.
He believes better opportunities will likely emerge later in the year, with a potential acceleration in Chinese growth boosting the more cyclical sectors.
“China’s distinct inflexion in policy from COVID control and containment to a more pro-growth setting is very positive for Australia and a potential thawing of relations provides additional upside risk.”
Cashflow to test investor strategies
Verse Wealth financial adviser, Ellie Fordham
Ellie Fordham also agrees that volatility is a given for 2023. And it’s going to cause problems for retail investors with dwindling cash reserves.
“Over the course of the last decade, we’ve seen periods of volatility, often with quick rebounds, but investment temperament will be tested in the 12 months ahead,” says Fordham.
Verse Wealth financial adviser, Ellie Fordham.
“We may not see the previous signs of markets rebounding as we have in the past. Some retail investors are likely to have come to expect positive returns on a consistent basis and their expectations may need to be adjusted.”
Fordham adds that the economy and sharemarkets aren’t as closely correlated as retail investors may think.
“With sharemarkets being forward-looking the impact of a potential recession in the Australian economy may play out differently in markets,” she says.
“Cash flow and cash reserves will be tested in a rising interest rate environment with increased cost of living pressures. This may put strain on the ability for retail investors to maintain any long-term investment strategies, which is a key ingredient to investment success.”
Recession incoming, but some ‘bargains’ too
Equity Trustees Asset Management head of equities, Chris Haynes
Chris Haynes of Equity Trustees says there will be an opportunity for bargain hunting. Louie Douvis
There may be a soft landing, but investors need to prepare for a 2023 recession, says Chris Haynes.
“We need to be prepared for the full impact of the rate rises we have had – and the possibility of a few more to come. Inflation is an issue and the RBA needs to ensure it gets it under control. We need to be prepared for the pain that is yet to come in the economy,” he says.
“The stockmarket has already marked down the share prices of the discretionary consumer sector, but we have not seen the earnings decline yet. We should expect to see that in 2023. And we should be prepared to pick up some bargains.”
He says to expected further energy price rises, and warns Australia could lose its competitive advantage in energy.
“Industries which rely on cheap energy will leave our shores and head to those countries that do.
“We may also see a period of below trend growth and in that environment stock picking becomes important especially focusing on quality factors such as balance sheet, pricing power and earnings certainty.”
Tech stocks could be the winners
Global X ETF’s head of distribution, Kanish Chugh
The rebound will favour tech giants, says Kanish Chugh, pointing out Apple in particular.
“With a market cap around US$2.4 trillion ($3.6 trillion) which is more than Amazon, Tesla and Berkshire Hathaway combined, growth is still on the cards for Apple,” he says.
Kanish Chugh
“It is one of the most dominant players in the smartphone market, with 2022 being the first year iPhone users outnumbered Android ones in the US which contributed more than half of Apple’s 2022 US$394 billion revenues.
“This proven track record, paired with the potential economic rebound and return of consumer confidence positions Apple and alike FAANG businesses to be a worthwhile opportunity for those who are willing to be patient and expand their investment time horizons.”
He adds that while the length and severity of a 2023 recession remains uncertain, renewables also present another “pocket of opportunity”.
The 2050 net-zero deadline is prompting resources companies to increase green exposure, and is fuelling interest in transition metals such as copper, nickel and lithium.
“As demand increases, supply will contract effectively driving up commodity prices.”
Bonds bull market over, recession for winter
Schroders Australia deputy head of fixed income, Kellie Wood
Schroders deputy head of fixed income in Australia, Kellie Wood.
Kellie Wood predicts a recession in the middle of 2023, due to the “unprecedented speed, magnitude and synchronised monetary policy tightening”.
And with the long-running secular bull market coming to an end, she believes active management will account for a greater portion of total return.
“Active management of core fixed income exposures should be a far more compelling alternative than has been the case in the recent past given the restoring of value across the global fixed income universe,” says Wood.
“We believe most of the underperformance in bonds is now behind us – with a peak in yields and the market fully priced for this interest rate cycle given the level of inflation within economies.”
