While 2022 turned out to be a more difficult year than had initially been expected, AMP’s chief economist, Dr Shane Oliver, believes that investors have reasons to be optimistic about 2023.
“Easing inflation pressures, central banks moving to get off the brakes, economic growth proving stronger-than-feared and improved valuations should make for better returns in 2023,” he said in a recent note.
“But there are likely to be bumps on the way — particularly regarding recession risks — and this could involve a retest of 2022 lows or new lows in shares before the upswing resumes.”
Outlining the grounds for optimism, Dr Oliver said that evidence suggests inflationary pressures may have peaked and are slowing rapidly. He also pointed out that supply chain pressures have eased, demand is cooling and labour markets are showing signs of topping out.
In light of these developments, Dr Oliver stated that only a slight pullback in demand may be necessary to further depress inflationary pressure significantly.
“This suggests inflation could fall faster than central banks expect in 2023,” he said.
In AMP’s view, interest rates are likely approaching their peak globally, with the Reserve Bank’s (RBA) current cash rate of 3.1 per cent seen as the base case for the peak in Australia, albeit with the risk case of a hike to 3.35 per cent early next year.
Widespread fears of a recession may also not turn out to be as bad as feared, according to Dr Oliver, despite the risk of a recession likely being more than 50 per cent for the US and Europe.
“In the US, it may just be a sharp slowdown or mild recession in 2023 — if the Fed starts to ease up on the brakes soon and given the absence of other excesses that need to be unwound,” he predicted.
“Europe has moved away from Russian gas very quickly and providing its winter is mild, may continue to hold up better than feared. Or lags in the way rate hikes impact may mean recession does not hit till 2024, meaning it’s too early for sharemarkets to discount just yet.”
Meanwhile, as China reopens from its lockdowns, Dr Oliver said that markets would likely look through the anticipated surge in COVID-19 cases towards the reopening boost ahead, which he estimated will provide an offset to the slower growth expected in the US and Europe.
“Australian growth is likely to slow but avoid recession, reflecting the less aggressive RBA, the pipeline of home building work yet to be completed, and the strong business investment outlook,” he added.
Dr Oliver also suggested that the geopolitical environment may not be quite as negative in the year ahead, as no major elections will be held in key countries, the war in Ukraine may not get any more threatening and the ‘Cold War with China’ may thaw slightly.
As for AMP’s forecasts regarding the year ahead, global growth of around 2.5 per cent is anticipated, while growth in Australia is predicted to slow to 1.5 per cent.
Global shares are expected to return around 7 per cent over 2023 and AMP has forecast that local shares will continue to outperform the ASX 200 ending 2023 at around 7,600 points.
House prices are set to suffer a peak-to-trough fall of between 15 and 20 per cent before bottoming around the September quarter as potential rate cuts loom, while cash and bank deposits are predicted to provide returns of around 3 per cent.
However, Dr Oliver noted that inflation, politics in the US, issues in China, an escalation of the Ukraine conflict and a sharper-than-expected fall in house prices all pose risks for investors.
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
