Hope floats
With 2023 likely to be challenging for investors, there are still opportunities for growth
Following 2022, which was a challenging year for investors, 2023 will likely bring more trials. However, there are reasons to be optimistic, and growth will be found by the astute. Central banks have shown they will no longer fuel the continued growth of economies but are happy to force a recession, where needed, to cool inflation and reduce government borrowing. Interest rates will likely continue to rise, but at a lesser rate than initially expected. Inflation will reduce and settle but at a point higher than the targets governments and central banks set.
With no apparent end to the crisis in Europe, energy prices and economies in Europe and the UK look set to factor heavily in any prospects for the economic outlook. The year 2023 will be a challenging year for economies like those in the Eurozone, UK and US, but many experts expect more positive things for the markets.
It is worth remembering that sentiment and market prices tend to move ahead of, and quicker than, economies, often forecasting recessions and recoveries by leading the way. This means that whilst economic growth may be slow, market growth and recovery are still possible.
PREPARED FOR THE WORST, HOPING FOR THE BEST
Bad news, fear of inflation, and poor corporate results have already been factored into stock prices. There are signs of an easing in the global supply chain disruption, with air and sea freight prices beginning to fall. Backlogs caused by lockdowns are easing, and this will help increase consumption.
China could help Asia have a good year, as it continues to reopen regionally and provides further stimulus for recovery. Bond markets have changed with the speed at which governments increased interest rates over the last year, but there is now a way forward that means growth and quality are no longer two different things. Short-dated or indexlinked bonds are favoured when looking for overall yield.
The yield curve is currently inverted, this means that the interest rates on short-term bonds is higher than that of long-term bonds. Usually a good indicator of a recession, the negative yield curve does pose challenges for fixed income investors. Typically, the more risk adverse or conservative that a portfolio is, the higher exposure it would normally have to fixed income investments such as bonds and treasuries.
Over the last year this traditionally stable asset class has been anything but as governments have been raising interest rates with gusto. This does make for an opportunity in short term and index linked bonds as well as giving the potential to buy into bond funds that have seen their values adjusted accordingly
A SUSTAINABLE GROWTH MODEL
The year will allow investors, governments, institutions and corporations to look at a sustainable
growth model. Sustainable in this context means “not damaging the environment or people”.
An increase in demand for scrutiny of governance in major industries is driving this as well as targets set to reduce climate increases in temperature.
Local and regional economies look set to continue to do better than those in the Eurozone, UK and US. This is led by continued diversification and reinvestment of government assets. Construction and tourism will also continue to thrive, trends show.
Foreign exchange and the rapid strengthening in the value of the US dollar compared to most other currencies will have been felt acutely by anyone importing goods or services from economies pegged to the US dollar.
This increase in value often softens the relative downturn of investments when measured in currencies other than US dollars; it is a double-edged sword. However, investors should look to see what their exposure is to the reverse happening, as their home currencies begin to strengthen.
PARTING ADVICE
With careful planning and proper asset allocation, there are plenty of reasons to be optimistic about 2023. Advice should be sought on portfolio currency exposure, length of terms of any fixed interest (bond) instruments and what sector to invest in to pursue growth opportunities.
Jonathan Brookes, chartered financial planner and partner with Hoxton Capital Management
“BOND MARKETS HAVE CHANGED WITH THE SPEED AT WHICH GOVERNMENTS INCREASED INTEREST RATES OVER THE LAST YEAR, BUT THERE IS NOW A WAY FORWARD THAT MEANS GROWTH AND QUALITY ARE NO LONGER TWO DIFFERENT THINGS. SHORT-DATED OR INDEX-LINKED BONDS ARE FAVOURED WHEN LOOKING FOR OVERALL YIELD”