Economic & Market Outlook – February 2023
I think many of us will agree, the best thing to say about 2022 is that it’s now over. We experienced a fall of over 20% in global stocks and government and corporate bonds followed suit, and many are saying that it was a ‘perfect’ storm. Not what I think of as ‘perfect’ personally, the principle drivers being inflation and rising interest rates, definitely not ideal and various other economic factors have contributed to this including the war in Ukraine, China’s zero policy to Covid-19 and UK government issues.
As we look into 2023, we find ourselves at an interesting point of disconnect between the economy and the stock market. The two are often different with markets trying to look through the grim headlines to better times ahead, and we know that they tend to anticipate changes in the economy up to as much as 6 months prior to the any actual pivot.
The rise in interest rates last year has made bonds a viable income alternative for the first time in many years and when central banks turn their attention to supporting the economy rather than fighting inflation, rates will revert to a more neutral level, giving fixed income investments a further boost. Thus, there is a plausible case to be made for both equities and fixed interest asset classes to rise this year. Shares could benefit as we look through recession to the recovery beyond and bonds could bounce as the inverse relationship between yield and price becomes favourable again.
With this in mind, in 2023 we would like to see an earlier indicator from the Fed and other central banks; an unexpected improvement in the Ukraine situation; better news on Covid in China. All of these would have a significantly positive impact on depressed market sentiment.
Bonds to make a comeback? With interest rates set to decline, conditions bode well for stable and attractive bonds, as prices move in the opposite direction of yields. This would lead to a rise in the underlying capital value of fixed interest stocks.
US Equities, are likely to have continued volatility and earnings estimates are considered a little high at present. In addition, the US dollar is predicted to fall in value which in the short term will effect markets but looking further ahead this will improve the US’ ability to trade globally on a more even playing field.
UK and European Equities could offer a modest upside, with a forecasted 6.3% total return over 2023 as lower inflation nudges stock valuations higher. In addition the current price to earnings ratio is looking appealing with the UK sitting at approx. 10 x earnings and Europe at 12 x earnings compared to the US which is approx. 18 x earnings. These are often a good indicator of potential growth.
Emerging Markets and Japan, this has been a major bear market for the last couple of years, but is the tide now turning? Valuations are cheap, and cyclical winds are shifting in favour of emerging markets especially if global inflation eases more quickly than expected, the Fed stops hiking rates and the U.S. dollar declines.
Summary
It is reasonable to surmise that the beginning of 2023 will continue to provide challenging times ahead, however, if we do start to see inflation coming down slightly and China’s economy opens up properly again for the first time since Covid, then the outlook will certainly be more optimistic and would provide markets with the boost we are all keen to see.
We will therefore continue to work with you to assess your objectives and ensure you have a well-balanced portfolio that matches your attitude for risk and capacity for loss. We will consider what the impact the current stage in the economic cycle has on your exposure to various assets. Remember, volatility can be partially mitigated by diversifying investments suitably across a broad range of asset classes.
For clarification of any points discussed above and any future independent advice regarding your own financial planning, please do contact us on 01626 833225 or email [email protected]
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