Investment Market Update – January 2023

2022 – one of the worst years for investment returns since the Global Financial Crisis                                                                                                                                

As central banks around the world altered their monetary policy settings from accommodative to restrictive, the typical balanced portfolio was caught in the headlights, as interest rate increases flowed through to valuations in most asset classes.

Public investment markets were particularly hit, with negative returns in most major asset classes, from bonds, to property, and equities.

Global Share markets
December 2022
Financial Year 2022-2023
Calendar Year 2022
ASX 200
Dow Jones
United Kingdom
Shanghai Composite

The flight to quality saw a cleanout in speculative markets

The worst pain was felt in the more speculative sectors, with the US tech sector index, the Nasdaq, down one-third over the year. The frenzied speculation in high-growth tech stocks of the previous year fell back to earth.

Litmus stocks like Tesla bore the brunt of the sell-off, with its shares down 66% over 2022. Other speculative corners of international markets were equally shattered.

Cryptocurrencies experienced a wipeout, now known as the ‘Crypto Winter’. The launch of Initial Public Offerings (IPOs) onto the ASX in 2022 saw 62% of them close the year lower than their issue price.

In the US, Special Purpose Acquisition Companies (SPACs), which are publicly traded companies created to acquire or merge with an existing company, saw the market dry up.

The SPAC contracted to purchase Donald Trump’s media company Truth Social, was down 77% over the year.

The Australian share market once again outperformed the majority of global equity markets

The Australian equities market travelled 2022 better than most, with the ASX200 index returning -5.5%, compared with the Dow Jones at -8.8% and the Chinese index at -15.1%.

The focus now returns to how economies travel through the first half of 2023. Investors will be watching closely to see if central bankers can slow the level of economic activity and hence lower the current decade-high inflation rates.

With the fear of recessions weighing on investment markets, investors will be watching to see if central banks can achieve a soft landing and avoid a global recession. If they do, expect a solid market bounce.

If there is a global recession this year it will be the ‘most expected’ recession ever.

Analysts at this stage remain of the view that any US recession is likely to be short and shallow, but the uncertainty of a US recession and how that unfolds will be the key driver of investment market performance over 2023.

What to expect over 2023

Inflation – Inflation over 2023 is expected to fall and end the year substantially lower. This has already commenced, with many of the drivers of high inflation having reversed.

Supply chain bottlenecks are now largely ironed out of the system. With the increased supply of goods, many prices are now dropping, as inventories in the retail sector become overstocked and retailers are forced to discount.

Global recession – If there is a global recession this year it will be the ‘most expected’ recession ever.

In 2023, recession, actual or feared, has joined inflation in driving the volatility in investment markets. The International Monetary Fund (IMF) will shortly revise its economic growth projections again on the expectation that a recession will hit a third of the world this year.

Analysts at this stage remain of the view that any US recession is likely to be short and shallow, but the uncertainty of a US recession and how that unfolds will be the key driver of investment market performance over 2023.

Interest rates – Rate rises and their effect on the level of economic activity usually have a lag of between six to twelve months. The first six months of 2023 will signal how last year’s interest rate rises have impacted consumer and business activity.

Wages – Australia has nearly returned to pre-COVID migration numbers. The opening of borders and the return of skilled migrants and international students all point to an easing of the employment pressures experienced over 2022.

Wage growth expectations should lower over the year. Interesting to note here that the majority of employment growth is in small and middle-sized businesses, with many large companies reducing staffing levels, particularly in the tech and retail sectors.

China COVID reopening – Following the G20 meeting in Bali in November, China has taken several major steps to re-engage with the West, including the renewal of meetings with Australian government ministers.

China’s complete turnaround on its draconian COVID lockdown measures should further support global growth over the year.

Crypto winter – Crypto has become the barometer for what is effectively a flight to quality, as global liquidity is being tested following the removal of zero-cost money from financial markets. As the famous Warren Buffett quote reminds us: ‘You know who is swimming naked when the tide goes out!’.

The collapse of several high-profile crypto companies, including FTX, highlights the risks of investing in untested and unregulated markets.

The positive here is that the removal of speculative excesses in any market strengthens the remaining players.  Blockchain and crypto may have interesting roles to play going forward, now that speculators are retreating.

Housing – Australian house prices have experienced one of the largest yearly falls in over 50 years, declining around 7% over 2022. They remain on a downward trajectory.

During the COVID lockdowns, banks could borrow via the RBA at a rate of 0.1% for three years. This resulted in fixed-rate mortgage rates dropping below 2%.

These three-year fixed rate deals start to mature during 2023. Borrowers will be shocked to find that they are renewing their fixed rate mortgage at rates closer to 6%.

The outlook for housing over 2023 remains challenging but will be supported by the return of high migration numbers.

Kauri Wealth Management is a Fee for Service investment advisory business and as such my advice is built around ongoing personal relationships with my client base. Personalised independent advice is backed up by a breadth of industry knowledge.

I accept a limited number of new clients each year and would be happy to discuss this further with you. Please don’t hesitate to contact me.

Russell Lees
Senior Adviser
Phone: +61 439 852 963

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