Last year was a tough year for US investors with the S&P 500 index down 18 per cent (after dividends) and US bonds down about 15 per cent. However, returns for Australian investors were considerably better with the S&P/ASX 200 index only down 1.1 per cent (after dividends).
The big events of the year were: Russia’s invasion of Ukraine and the subsequent sanctions on Russian commodities (particularly oil and gas); inflation spiking across the developed world, leading to Central Banks hiking interest rates and China’s continued COVID lockdowns. However, by the end of the year China reversed its lockdown policy and seems to be more open to dialogue with Australia
As we move into 2023, inflation, interest rates and energy supply remain key issues, and the Russian/Ukraine war is still an unknown factor. Markets are currently cheering China’s reopening, but we remain wary of the consequences of a new COVID wave over the Chinese New Year holiday period.
Europe has managed to navigate the absence of Russian natural gas reasonably well, thanks to a mild winter thus far and gas supplies being restocked via LNG imports. However, Europe is also facing rising interest rates in an effort to reduce demand and, ultimately, inflation.
In the US, the Fed seems headed for a 4.75 – 5 per cent cash rate by mid-2023 and inflation is now falling but there is still a long way to go (from 7 per cent to 2 per cent). The mid-term elections led to the Democrats retaining the Senate, while the Republicans gained the House.
Australia remains ‘the lucky country’ with abundant commodities the world needs and generally low public debt levels (relative to the developed world). The lower Australian dollar (AUD) has helped support exports and an end to the COVID pandemic should see immigration recover in 2023.
The ‘China reopening’ narrative is keeping commodities buoyant at the moment and there have been some positive signs of improved diplomatic relations between China and Australia in recent months. But we are still cautious about China given it will most likely face a new COVID wave and then possibly a global recession.
The Australian economy has been resilient thus far, boosted by commodity export windfalls and resilient consumer spending. But interest rates have been rising at a rapid pace and households are yet to face the full impact of higher home loan rates coupled with high energy costs and rising expenses generally.
Outlook
Australian markets have generally been outperforming global markets and we expect this trend to continue, due to Australia’s strong economic fundamentals. That said, the outlook for banks and commodities will play a large part in the outlook for the local share market.
As mentioned above, we remain cautious and expect the next events to include a major slowdown in the global economy and earnings downgrades.
Inflation should gradually retreat but in the meantime, we will be dealing with very challenging conditions for companies.
We think it is too early to be talking about Central Banks ‘pivoting’ – that is a reversal in their tightening policy. This will come but is not likely until late 2023 or most probably 2024.
We expect markets to remain volatile for most of 2023, but this will present opportunities ahead of the next bull market (as interest rates come down).
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