Investors will be pleased to see the back of 2022, a year that brought war to Europe, a cost-of-living crisis and a looming recession. The start of a new year is naturally a time to be optimistic and look forward to better times ahead. Whilst risks certainly remain, there are good reasons to suggest that asset markets will enjoy a more positive year in 2023.
Fears of recession – Central Banks hold the key
2022 was dominated by inflation, which was driven markedly higher than expectations due to the economic effects of the war in Ukraine. The US Federal Reserve, Bank of England and European Central Bank raised interest rates over the course of the year in a bid to bring inflation back under control, ignoring the potential risks of pushing economies into recession. US inflation has now fallen consistently from the peak in June, which is a trend we expect will continue throughout 2023, and inflation in the UK may well now be past the peak.
The Fed have indicated that they are content to slow the pace of future rate increases, and indeed, we feel that rates across the Western world are not far from a pivot point. In the first quarter, we expect markets will continue to hang on every word uttered by central bankers, looking for a clear signal that they have taken the action they feel necessary to bring inflation under control.
Whilst the global economy may not fall into recession this year, a mild, shallow recession in the US, UK and Eurozone is a probable outcome. As economies contract, attention will then turn to central banks, who could look to ease monetary conditions by the end of the year. This could herald a significant change in market sentiment, and be a positive sign for asset prices generally.
Mind the gap
Following a difficult year for Equities, global market valuations now look more appealing than they did at the start of 2022. Weak price action over the course of the year has led to attractive valuations, particularly in sectors such as Technology. What isn’t clear, however, is whether earnings can match market expectations, or if recessionary conditions are sufficient to dent corporate earnings as 2023 progresses. Much will depend on how resilient consumers remain in the face of rising costs, and whether unemployment rises appreciably. Across the Western World, structural changes following the pandemic continue to lead to staff shortages in many industries, and we suspect unemployment may not be the issue that would ordinarily be the case as an economy enters recession.
The rapid rise in inflation and pace of interest rate increases during 2022 battered Government and Corporate Bonds. As a result, valuations have become attractive, and investment grade and Government debt now offer yields that look appealing, as interest rates are close to their peak and could potentially fall by the end of the year. Whilst it is tempting to look at the yields offered by higher yielding debt, default risk could rise and it may well be preferable to focus on credit quality during 2023.
Time to look East?
With growth likely to remain subdued in the US, UK and Eurozone, investors may well be tempted to look towards Asia and Emerging Markets for growth. There are clearly opportunities here, in particular in China, where their zero-Covid policies, which are now being eased, have hampered growth. Chinese Equities underperformed significantly over the last year and whilst valuations could be attractive, investors may need to be patient as Covid cases climb following the easing of restrictions, and concerns over the ailing property market continue. Japan also looks interesting, as inflationary pressures are lower here and domestic demand looks solid.
A more stable political year ahead?
Since the turn of the decade, investment markets have been buffeted by a series of external shocks, from the Covid-19 pandemic, to the war in Ukraine, a global inflationary spike and the potential for recession. Clearly, geopolitical risk has not gone away, as the war in Ukraine seems unlikely to reach a swift conclusion, and tensions between the US and China continue. The political landscape has also been unhelpful to investors, as continued uncertainty in Westminster and on Capitol Hill have weighed on sentiment. 2023 could, however, be a year where politics has less of an impact. The US mid-term elections are out of the way, and with the revolving door of number 10 appearing to have stopped spinning – for now at least – we expect markets can focus on economic, rather than political factors, over the coming year.
Headwinds for housing
We fully expect the UK housing market to come under pressure during 2023. After strong growth over the last two years, a combination of higher mortgage rates, the cost of living crisis and economic uncertainty could lead to substantial falls in house prices. Of particular note are the number of borrowers whose fixed rate deals come to an end during the year ahead. This could stretch affordability for those looking to move, and with first time buyers facing headwinds, market activity could be subdued throughout the year.
Time to review your portfolio
After a bruising 2022, we feel there are many reasons to take a positive view on how investment markets will perform over the coming year. Equities valuations are attractive in many areas, and barring a significant slump in global earnings, offer investors good value at current levels. Staying at the defensive end of the Equities spectrum may be sensible during the first few months, although we feel high growth stocks may come back into favour later in the year.
Bond markets should also stabilise after the disappointing year in 2022, with attractive yields on offer. Investors may well be advised to focus on credit quality, given that recessionary conditions are expected.
Property investments could come under pressure during 2023. Commercial property valuations have already fallen back during the last quarter of the year, and could continue to struggle as the economy contracts. Investors in residential property will need to batten down the hatches as prospects for the UK housing market look testing for the year ahead.
The new year is a good time to review existing investment portfolios and determine whether they are invested appropriately in light of the expected conditions. Our experienced advisers are on hand to review existing strategies and provide independent advice on how best to invest for the year ahead…
If you are interested in discussing the above further, please speak to one of our experienced advisers here.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.