Global
2022 was a tough year for US investors with the S&P/500 index down 18% (after dividends) and US bonds down around 15%. However, returns for Australian investors were considerably better with the S&P/ASX 200 index only down 1.1% (after dividends), while Australian SMSFs generally have low exposure to bonds, preferring cash, fixed term deposits and hybrids instead - which all generated positive returns. Further, returns from International Equities (unhedged) were buffered by a lower AUDUSD, which helped reduce losses. So a challenging year but not that bad for Australian investors.
The big events of the year were: Russia’s invasion of Ukraine and the subsequent sanctions on Russian commodities (particularly oil and gas); inflation spiking across the developed world, leading to Central Banks hiking interest rates and China’s continued COVID lockdowns. However, by the end of the year China reversed its lockdown policy and seems to be more open to dialogue with Australia (post a new Labor government in Australia and a third term for President Xi).
As we move into 2023, inflation, interest rates and energy supply remain key issues. The Russian/Ukraine war remains a key unknown. Markets are currently cheering China’s reopening, but we remain wary of the consequences of a new COVID wave over the Chinese New Year holiday period.
Europe has managed to navigate the absence of Russian natural gas reasonably well, thanks to a mild winter thus far and gas supplies being restocked via LNG imports. However, Europe is also facing rising interest rates in an effort to reduce demand and ultimately inflation.
In the US, the Fed seems headed for a 4.75-5.00% cash rate by mid-2023 and inflation is now falling but there is still a long way to go (from 7% to 2%). The mid-term elections led to the Democrats retaining the Senate, while the Republicans gained the House. We expect another showdown on the US debt limit (US$31.4 trillion) by mid-2023.
Australia
Australia remains ‘the lucky country’ with abundant commodities the world needs and generally low public debt levels (relative to the developed world). The lower AUD has helped support exports and an end to the COVID pandemic should see immigration recover in 2022.
As mentioned above, the Australian share market was only down 1.1% over 2022 but we should note that the Resource, Energy and Bank sectors ‘propped’ up the market, with all other sectors in the red by the end of the year. A key issue in 2023 will be if these sectors can hold their gains. We are sceptical on Banks, as the benefits of higher interest rates will soon turn to lower credit growth and higher loan impairments. Resources and Energy may have a better chance, but much depends on how material the global economic slowdown is (as a result of higher interest rates).
The ‘China reopening’ narrative is keeping commodities buoyant at the moment and there have been some positive signs of improved diplomatic relations between China and Australia in recent months. But we are still cautious on China given it will most likely face a new COVID wave and then global recession.
The Australian economy has been resilient thus far, boosted by commodity export windfalls and resilient consumer spending. But interest rates have been rising at a rapid pace and households are yet to face the full impact of higher home loan rates coupled with high energy costs and rising expenses generally.
Outlook
Australian markets have generally been outperforming global markets and we expect this trend to continue, due to Australia’s strong economic fundamentals. That said, the outlook for Banks and commodities will play a large part in the outlook for the local share market.
As mentioned above, we remain cautious and expect the next events to include a major slowdown in the global economy and earnings downgrades. Inflation should gradually retreat but in the meantime, we will be dealing with very challenging conditions for companies. We think it is too early to be talking about Central Banks’ ‘pivoting’ - that is a reversal in their tightening policy. This will come but is not likely until late 2023 or most probably 2024.
We expect markets to remain volatile for most of 2023, but this will present opportunities ahead of the next bull market (as interest rates come down). We are positioned defensively and will be on the lookout for such opportunities as they arise.
The next key events on the calendar include:
Fed meeting – 31 Jan/1 Feb 2023
RBA meeting – 7 February 2023
Australian 1H23 reporting season – February 2023
Bill Keenan
Principal, Portfolio Manager
Bill Keenan is the founder of Sunbird Portfolios. Sunbird provides independent advice to leading financial advisers across Australia.
Bill has 28 years’ experience in financial markets and holds a Bachelor of Business in Accounting and a Graduate Diploma in Finance and Investment.
Warnings
General Securities Advice - any advice provided in this document, is general in nature only and does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, the reader must consider whether it is personally appropriate considering his or her financial circumstances or should seek independent financial advice on its appropriateness.
Past performance is not a reliable indicator of future performance.
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