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A Finsec View – The 2022 Wrap and 2023 Outlook
16th December 2022
‘Tis the season when the world’s strategists, economists and analysts gaze into their crystal balls and make predictions for the year ahead.
And on the surface, at least, it looks like a pretty ‘meh’ year ahead, with both Goldman Sachs and Morgan Stanley tipping the S&P 500 – the key benchmark for global share market sentiment – will finish 2023 either flat or slightly lower than 2022.
But dig a little deeper, and the next 12 months (much like 2022) looks anything but boring. More on this below.
Perhaps the biggest shift we have seen heading into 2023 is a return to quality stocks – particularly companies with strong balance sheets. The worlds of crypto, Bitcoin, memes, NFTs and finfluencers are so last year!
For those that might have been questioning if their portfolio was a bit traditional and old style – remember that the role of fund managers is to scrutinise companies from every sector (new and old) in a bid to identify those they believe will still be here (and creating value) in 10 years’ time.
Thanks to all our readers for your support and comments during 2022, our fortnightly readership is now well into the 1000’s!
2022’s X-Factors
Forty-one years ago, Dr Don Stammer PhD developed an obsession. A compulsive need, as each year ends, to list the main X-factors affecting investment returns in the previous twelve months – and to pick the X-factor for that year.
The x-factor is defined as an unexpected influence that wasn’t thought about when the year began but came from left field to have powerful effects on markets.
It doesn’t preclude one from taking a view of where the economy or markets seem to be headed; rather, it’s a reminder that investors need to allow for uncertainties and surprises – because these are inevitable.
In no particular order, the finalists for the x-factor in 2022 include:
- The Russian invasion of Ukraine in February inflicted a big human cost, disrupted the global economy, and underlined the risk of nuclear war.
- Until recent weeks, China kept its hard line on eliminating Covid and has remained shut down for much of 2022. It has also maintained a tight clamp-down on dissent in Hong Kong and its military threat to Taiwan.
- The sudden return of high rates of inflation.
- Many central banks raised their cash rates quickly and often in big bites; ‘yield curve control’ was dropped, and ‘quantitative easing’ switched to ‘quantitative tightening’.
- Some central banks, and notably the Reserve Bank of Australia, gave up offering ‘forward advice’ on changes in their cash rates – and apologised for being so wrong in the messages they’d put out in the last two years.
- Energy prices, notably for coal and gas, traded at very high levels.
- Unemployment rates here in Australia and in the US fell to their lowest levels in almost fifty years.
- Rates of wage increases started to accelerate in many countries.
- In September-October, markets were in turmoil after the then-UK prime minister announced a further and large fiscal boost.
- Investors’ enthusiasm for ESG seems to have reduced during the year, as fossil fuels rose in price and investors worried renewables might not be able to keep the lights working.
- Gold and particularly cryptocurrencies failed to protect investors after the return of inflation.
And the winner?
In Don’s view, the X-factor for 2022 is the surge in inflation experienced early in the year and the sharp increases in interest rates that quickly resulted – and all this at a time when many investors and most central banks had expected inflation and interest rates to be ‘lower for longer’.
The search for next year’s X-factor will no doubt make for lively debates at the Sunday barbeque. Remember, though, that X-factors must be unexpected; anything that’s widely anticipated doesn’t qualify (even if, in hindsight, it seems obvious – all that money printing … who would have thought…)
The X-factor in 2023 could well be something that happens to inflation or to the resolve of central banks to bring inflation down to their target rates as economic growth slows and unemployment increases. As for Don, his prediction is that share markets will bottom before the next global recession is underway.
For those interested in the previous 41 winners of the x-factor games, click here.
Word of the Year & Most Googled
Every 12 months, the dictionaries try to preserve a massive cultural moment by dropping a word of the year. If a dictionary has done its job right, its word of the year will truly reflect how the zeitgeist and the English language has changed.
Have they done a good job in 2022? We’ll let you be the judge…
A slang term, often used in the expressions ‘in goblin mode’ or ‘to go goblin mode’ – is ‘a type of behaviour which is unapologetically self-indulgent, lazy, slovenly, or greedy, typically in a way that rejects social norms or expectations.’
An extended period of instability and insecurity
An independent political candidate who holds generally ideologically moderate views but who supports strong action regarding environmental and climate action policies and touts the prioritising of integrity in politics.
Interested to know what we’ve been googling?
According to the tech giant, its most searched terms for 2022 (and topping the list in Australia) was Wordle, the online word game that had many hooked, particularly early on in the year. Further, showing our love of sport, Australians searched for ‘Australian Open’ and ‘World Cup’ (football/soccer, T20 etc.), accounting for 6 of the top 10 spots. Aussies also wanted to know what was happening in the Ukraine (#5), and we searched for the terms’ flood’, ‘La Nina’ and ‘when will the rain stop?’ more than any other country in the world. But, perhaps the biggest revelation was the thing we were most interested in learning how to cook… tripe? Mmm…we didn’t just google that.
Charts of the Week
Our first chart of the week measures Australian consumers’ perception of their finances relative to a year ago. It’s not great news. We’re hitting lows last seen in 2008, and provides good reason to believe spending will slow in the new year.
Our second chart depicts the annual performance of bond markets over the last 150 calendar years, with 2022 as the clear outlier (column 1).
The other three years of significant negative returns include 1994, 1980 and 1999 (circled in red). Interestingly in each case, they have been followed by strong returns in the subsequent year or two (highlighted in yellow).
Whilst past performance is no guarantee of future results, the balance of probability would suggest that 2023 may well be a good year for bond markets.
The Outlook for 2023
As we head into 2023, investors will remain focused on persistent inflation, hawkish central bankers and slowing growth. Against this backdrop, staying agile will remain crucial. The risk for a number of different outcomes is quite large and while experts predict we are going to have a ‘soft landing’ rather than something more nefarious (albeit bumpy), being patient and cautious will rule the day.
Equities
Equity markets will likely remain challenged in 2023 as companies navigate high costs, changing consumer preferences and slowing growth. (Look out for potentially sharp falls in early 2023 as rising rates finally hit corporate earnings).
This backdrop lends itself to quality stocks or companies that can weather this climate much more nimbly. Managers also report pockets of value, particularly in Europe, where valuations are now attractive and giving investors an appropriate risk-reward trade-off.
Fixed Income
2022 was a challenging year for fixed income as it had a material reset from post-pandemic levels and post-pandemic policies (bonds arguably had their worst year in history).
In 2023, managers will be closely watching inflation and the risks of over-tightening, as the US Fed continues its singular focus on fighting inflation while the macro backdrop continues to deteriorate. The Fed’s hawkish rhetoric will likely shift over the next year, perhaps as early as the first quarter of 2023. A softening tone would open the window for increased opportunities in fixed income. (There are two distinct camps (the ‘doves’ and the ‘hawks’) when it comes to inflation, the raising of rates, and for how long – A sage view on the topic is discussed in this Wall Street Journal article found here).
What does this mean for Australia?
Obviously, the first point to make is that sentiment on the local market is affected by what happens on Wall Street. But, investors also need to ask themselves whether they think Australia can dodge the sort of earnings recession experts believe the US is headed for. Inflation and interest rates probably won’t go as high in Australia as in the US, but the labour market trends look broadly similar: low unemployment and growing wage pressures that will eat away at corporate profit margins.
Lower earnings are certainly built into local share prices, but the big question remains is the local market undercooking the hit to profits, as many believe could be happening in the US?
Early 2023 is likely to be fraught with uncertainty for markets. But, as we move past peak inflation, peak interest rates and peak volatility, patient long-term investors will likely benefit.
It’s important to note the big caveat around these outlooks given just how unpredictable and volatile 2022 has been; seeing out 12 weeks, let alone 12 months, is hard enough!
The World Ahead in 60 Seconds
It’s short but worth a watch – A 60-second guide to the coming year through the eyes of the Economist.
Links to opinions and articles on each topic can be found here.
Quote of the Week
As we head into a new calendar year, we thought this quote from James Clear, author of newsletter ‘3-2-1 Thursday’, hits the mark.
“Your calendar is a better measure of success than your bank account.”
On a Lighter Note
According to a Japanese study, looking at cute animal pictures can boost your focus.
And so, for something a little lighter and a new tradition for this time of year, we give you the annual Wildlife Comedy Awards. You can view all the winners and the finalists here. You’re welcome.
New Email
A quick piece of housekeeping.
As our business continues to grow, there is a necessity for more team members to communicate directly with clients. We are aware this may cause confusion when receiving an email from an unfamiliar name.
Consequently, by way of identification, our email’s ‘display name’ (as the sender) now contains the team member’s name followed by FinSec Partners in brackets. For example: Andrew Creaser
Seasons Greetings
It has been another extraordinary year, and we would like to take this time to say thank you for your ongoing support. It has been a privilege to be of service.
From a FinSec perspective, 2022 has seen us enhance our specialisations with the appointment of five new advisers and several new team members. We once again embraced (and implemented) a raft of new regulations (a product of the Royal Commission). We also enjoyed a full program as an ‘industry expert’ with SA Leaders, and the team continued their fantastic work serving breakfasts to school children through the Kick Start for Kids program.
Whilst we acknowledge with pride all of these achievements, in the spirit of Kaizen, please rest assured that we are now looking to the future and continue our mantra of “small incremental improvements, every day”.
The festive season reminds us once again of the importance of friends and family, of taking a well-earned break and embracing the spirit of the season. We hope you take a brief moment to appreciate and enjoy this seasonal ‘break’, and may you all have a happy and safe new year. As we, too, recharge our batteries, we will be taking a brief editorial break through January and look forward to seeing what the world has in store for our first view in February 2022.
Our office will be closed from 12 noon on Thursday 22nd December 2022
and will re-open at 8.30am on Tuesday 3rd January 2023.
Stay safe and look after one another. As always, if you have any concerns or questions at any time, please reach out to your FinSec adviser.