With 2023 now upon us, we explore the final investment committee analysis of 2022 and what actions may be required over the coming months to capitalise on the likely trajectory of investment markets.
We explore several market scenarios and what we rate as the most likely sequence of market events to unfold in 2023.
The 2023 Outlook
Our ‘Base Case’ scenario outlook for 2023 is very simple – the central banks leading the monetary tightening charge over 2022, namely the US Federal Reserve (Fed), Reserve Bank of New Zealand (RBNZ) and Bank of England (BoE) can consider cutting rates in the second half (H2) of 2023 and thereby initiating the start of the next investment cycle (at least for them). Laggards like the Reserve Bank of Australia (RBA), European Central Bank (ECB) and Bank of Canada will likely not cut rates until 2024 – which implies a disparate global economic cycle and we’ll need to position accordingly. The ‘Santa Claus’ rally we are presently witnessing is likely to prove short lived as the weight of past monetary increases are likely to weigh heavily of the returns on capital – thus outweighing the promise of a lower cost of capital that is presently driving an upswing in higher risk (property, shares markets) asset classes. The upward path of the next bull market is likely to prove slow and grinding as central banks have their hands tied (in terms of providing too much stimulus) by the threat of another inflation breakout. It certainly appears like it won’t be the reflexive type of upward bounce experienced at the initiation of the past two investment cycles (post GFC and post COVID) which were fuelled by copious Quantitative Easing and government stimulus. As a consequence, alpha (excess return) is likely to prove far more valuable than beta (relative volatility to the index) for the next investment cycle and choosing the right managers will be crucial…
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