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December 22, 2022

2023: expect a rough ride with better returns

2022 finally saw the world shake off the grip of Coronavirus as it transitioned from pandemic to endemic.  The year was dominated by high inflation, rising interest rates, war in Ukraine and recession fears which hit bonds and shares hard, driving losses for balanced growth super funds.

2023 is likely to remain volatile and a re-test of 2022 lows for shares is a high risk. But easing inflation, central banks stepping off the brakes (with the RBA at or close to the peak on rates), economic growth likely stronger than feared and improved valuations should make for better returns. 

There are likely to be bumps on the way – particularly regarding recession risks – and this could involve a re-test of 2022 lows or new lows in shares before the upswing resumes.

  • Global shares are expected to return around 7%. The post mid-term election year normally results in above average gains in US shares, but US shares are likely to remain a relative underperformer compared to non-US shares reflecting still higher price to earnings multiples (17.5 times forward earnings in the US versus 12 times forward earnings for non-US shares). The $US is also likely to weaken which should benefit emerging and Asian shares.
  • Australian shares are likely to outperform again, helped by stronger economic growth than in other developed countries and ultimately stronger growth in China supporting commodity prices and as investors continue to like the grossed-up dividend yield of around 5.5%. Expect the ASX 200 to end 2023 at around 7,600.
  • Bonds are likely to provide returns around running yield or a bit more, as inflation slows and central banks become less hawkish.
  • Unlisted commercial property and infrastructure are expected to see slower returns, reflecting the lagged impact of weaker share markets and higher bond yields (on valuations).
  • Australian home prices are likely to fall further as rate hikes continue to impact, resulting in a top to bottom fall of 15-20%, but with prices expected to bottom around the September quarter, ahead of gains late in the year as the RBA moves toward rate cuts.
  • Cash and bank deposits are expected to provide returns of around 3%, reflecting the back up in interest rates through 2022.
  • A rising trend in the $A is likely over the next 12 months, reflecting a downtrend in the now overvalued $US, the Fed moving to cut rates and solid commodity prices helped by stronger Chinese growth.

WHAT TO WATCH in 2023

  • Inflation.  If it continues to rise, central banks will tighten more than we are allowing for risking deep recession.
  • US politics. The return to divided government, with GOP controlling the House, runs the high risk of a return to brinkmanship around the debt ceiling, causing volatility in markets as we saw in 2011 and 2013.
  • China issues. Increased tensions around Taiwan are the main risk.
  • An escalation of the Ukraine conflict. This could adversely impact Europe.
  • Australian home prices. A sharper than expected fall as fixed rates reset and unemployment rises, could cause financial stability issues.

Extracted from ‘Review ’22 / Outlook ’23: Expect a rough ride, but better returns by Shane Oliver for Informed Investor.  Read the full article here (no subscription required).

This information is general advice only and does not take into account your personal circumstances, goals and objectives. Therefore, you should consider its appropriateness for your circumstances before acting on this information.  

For strategic advice tailored to your personal situation, please reach out: info@genesisfp.com.au.

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