WORDS ON WEALTH
By Martin Hesse
With so many factors at play – from post-Covid stresses and the war in Ukraine to energy shortages, roaring inflation and unprecedented government and household debt – market analysts and economists are understandably wary of making predictions on how 2023 is going to pan out for investors.
Overall, outlook could be summed up as bearish, in that they expect some sort of an economic recession and ongoing stock market volatility (not forgetting that economies and stock markets often perform out of sync with each other), but many also recognise that there may be stock-buying opportunities to be had.
“This time is different” is a phrase often shunned by investment professionals, who point to the resilience of equity markets over the long term. But for people who don’t have the luxury of investing for the long term, every time is different, because while markets often bounce back relatively quickly after a fall, they sometimes take a bit longer – 12 years in the case of the Great Depression of the 1930s and a decade in the case of Japan’s stagnant stock market of the 1990s.
What certainly makes a difference is that the era of “easy money” in the way of government largesse, low-interest-rate debt and quantitative easing, which has flooded the markets since the 2008 financial crisis, and contributed in no small measure to the uptick in inflation, is over.
If you have an investment horizon of more than five years, don’t pay too much heed to the forecasts below. But if you are about to retire, or are in retirement, you may do well to reflect on them and book a chat with your financial adviser.
Prophets of doom
There are always the fearless (or idiotic?) few who are willing to stick their necks out and make dire predictions. Considering the circumstances, one should not ignore out of hand the more insightful among them.
For example, Peter Schiff, US stock broker, financial commentator and CEO of Euro Pacific Capital, who predicted the 2008 crisis, says the forthcoming recession will be far worse than most people think because of an interest-inflation spiral that the central banks won’t be able to control. On the Megyn Kelly Show on YouTube channel SiriusXM, Schiff said the US Federal Reserve created a “bubble economy” through years of low interest rates and quantitative easing, which was highly inflationary. He said this bubble first manifested in the stock market, where share valuations soared to irrational levels, but has now spread to the consumer economy.
“We are now experiencing the consequences [of the US Fed’s policies]: rising prices, and prices still have a long way to go. The recession is going to get a lot worse, because more income is going to be diverted to necessities like food, and interest rates will have to keep on rising, which will also take a lot of purchasing power out of the economy, because people have to service their debt, and if you’re spending money paying interest on money you borrowed to buy stuff in the past, you have less money left over to buy stuff in the present,” Schiff said.
This interest-inflation spiral coupled with the unprecedented levels of both household and government debt are what the doomsayers are so worried about, with one, Jim Rogers, US investment guru and financial commentator, expecting the “worst bear market we will see in our lifetimes”.
Bears
More moderate commentators believe that the central banks, though slow to begin with in pushing back against inflation, will succeed in preventing a runaway scenario, but are generally in agreement that there will be a global recession next year, after which inflation will stabilise at higher levels than they have been in the period since 2008.
In a recent Schroders presentation on investor outlook for 2023, the chief economist of Schroders, Keith Wade, said his team was more bearish than the overall market consensus. They expect a significant recession, but believe the central bank interventions will begin to work, and expect inflation to start subsiding as a result. In the US, energy prices – one of the drivers of the inflation upturn – are already coming down, Wade said. Europe and the United Kingdom will likely experience high inflation for longer because of their ongoing energy crisis.
The biggest surprise so far, Wade said, is that unemployment in the US has remained at record lows. But that is expected to change as the recession bites and companies begin to shed jobs.
China may be a bright light, because while the West is entering a recession, China appears to be emerging from a self-inflicted one caused by its strict Covid lockdowns. This will be good for commodity-reliant emerging markets such as ours, so South Africa’s recession may be a little shallower than that forecast for the US and Europe, Wade said.
In their report “Economic outlook: 12 crucial questions about the world in 2023”, economist Sanisha Packirisamy and Herman van Papendorp, head of investment research and asset allocation at Momentum Investments say that “although an over-tightening in monetary policy raises the risk of negative growth outcomes sooner, the risk of under-tightening is seen to pose a bigger threat. Unhinged inflation expectations could force central banks to tighten policy even more, over a longer period, damaging growth and jobs.”
Packirisamy and Van Papendorp expect the currently strong US dollar to weaken in the second half of 2023 as interest rate and growth differentials begin to narrow.
They believe central banks will need to have “clear sight of a sustained deceleration in underlying inflation and a reversal in tight labour market conditions for interest rate cuts to be considered”, but expect the US interest rate to peak at 5% in the first half of next year.
On South Africa’s outlook, Packirisamy and Van Papendorp say a global slowdown or recession would reduce demand for our exports, while question marks over our political outlook cast a dark shadow over investment and growth prospects.
They say the South African Reserve Bank is likely to hike rates further in the first quarter of 2023, but “the likelihood of an improved global risk backdrop towards the end of 2023 could see the SARB reversing policy”.
In a recent article “What do we have to look forward to beyond current performance?”, Victoria Reuvers, managing director of Morningstar Investment Management SA, also believes the central bank interventions will begin to work. “Maybe some have been a bit slow and some are not moving as quickly as we would like to see but they are moving. Credit must be given to the South African Reserve Bank in particular for its discipline and prudence when it comes to inflation targeting. Their strict adherence to their mandate often places short-term strain on South Africans. However, over the long term it ensures correct asset pricing and controlled inflation.”
On stock market performance, Reuvers says: “This year has seen broad-based equity price declines. While there were definitely sectors and segments of the market that were overpriced coming into 2022, we do believe there has been contagion across all sectors and markets, leaving some very attractive investment opportunities for investors that are patient and prepared to look beyond the noise.
“Based on where valuations are today, the future is looking bright. Currently, valuations are a poor timing tool, and when we say ‘future’ we are looking at three years plus. Over the next week, month and/or year, there could be continued volatility, but the key is to look across the valley.”
Bulls
Which brings us to the bulls – those who believe that we’ve already seen the worst of the stock markets, that the gloom and doom is already “priced in”, and investors can look forward to a bounce-back in equities next year.
In a recent survey by Bloomberg, some of the world’s biggest investors are predicting that stocks will see low double-digit gains next year.
“Amid recent optimism that inflation has peaked – and that the Federal Reserve could soon start to change its tone – 71% of respondents in a Bloomberg News survey expect equities to rise, versus 19% forecasting declines. For those seeing gains, the average response was a 10% return,” the report said. The informal survey of 134 fund managers included the views of major investors such as BlackRock and Goldman Sachs.
The report quoted Pia Haak, chief investment officer at Swedbank Robur, Sweden’s biggest fund manager, who commented: “Even though we might face a recession and falling profits, we have already discounted part of it in 2022. We will have better visibility coming into 2023 and this will hopefully help markets.”
A word of caution
Before you rush to buy what may be bargain-priced shares, a word of advice from Anet Ahern, chief executive of PSG Asset Management. In a newsletter to investors she says: “While many investors are eager to approach the market turmoil with the usual ‘buy a bargain’ mindset, we believe they may be disappointed with the items they buy on sale this time around. Not because these aren’t quality companies – many of them are and will likely still be around for a long time. But simply because the environment that drove their exceptional returns until recently will no longer be doing so in the future.
“Investors need to reassess the market with a fresh mindset, and critically evaluate which shares and sectors are likely to fare well in a world that is no longer driven by low inflation and easy money.”
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