2023 Market Outlook: A Good Year To Accumulate

Watch It On YouTube

2022 was a rough year as expected and unfortunately, 2023 will not be any better.

In this article, I will share with you my expectations moving into 2023 and why I believe it is a good year to accumulate more investments despite the pain that is expected in both the markets and the economy.

Without further ado let’s get started with the three central themes that are expected to play out in 2023.

1. Central Bank-Induced Recession

The first theme that I would like to talk about is the topic of recession.

Moving into 2023, it is almost certain that the global economy will enter into a recession that is induced by the central bank’s tightening in an effort to combat inflation.

So, for those who have not been keeping up with the developments in 2022, essentially what happened was that prices of your goods and services had skyrocketed with some countries experiencing double-digit inflation rates.

In response, governments all over the world stepped in to combat the unsustainable rise in prices via higher interest rates.

Higher interest rates would bring about higher borrowing costs for both businesses and consumers which then drives down economic activities as businesses' net earnings and consumer savings rates are negatively affected.

The problem today is the fear that the central banks would over-tighten and increase their interests’ rates too much which then ends up driving the global economy into the recession.

In fact, over three-quarters of the economist survey says that the risk is tilted to an over-tightening scenario and over 80% of them expect a recession to occur moving in the next 24 months.

Unlike previous recessions, however, if indeed a recession materializes in 2023, do not expect the central banks or the government to step in to “resolve the recession” as the very recession that we may be experiencing is one that is intended by design.

The purpose of inducing this recession is to slow down demand and get inflation back in control as it is unlikely the supply-side constraints can be resolved to alleviate the current inflation situation.

This is especially so for developed countries as they face production constraints that are driven by immovable trends such as lower labour participation rate, aging population and deglobalization which inevitably pushes up cost which then gets transferred to consumers via higher prices.

The only time when the central banks and the government may step in is if the

1. unemployment rate increases beyond what was expected

2. economic activity deteriorates further than what was intended AND

3. inflation rate comes back down the federal reserves' 2% target.

So far, this does not look likely to happen for much of 2023 as the employment rate is still strong, the economic activity, while deteriorating is still healthy and on the topic of inflation, it is unlikely that it's going to come back down to 2% anytime soon, especially with China’s reopening which brings me to my next topic.

2. China’s Reopening

The second big theme of 2023 is China’s gradual reopening and move away from its stance on covid zero.

While China’s reopening is one that is highly rejoiced, the road to reopening will be one bumpy ride ahead as China will have to battle with rising covid cases, death counts and a strained healthcare system

Furthermore, given the constant Chinese propaganda on COVID-19 over the past 3 years, it is unlikely that China’s economic activity will resume back to pre-covid levels immediately after the government exited their covid zero policies even in the absence of restrictions, people have voluntarily stayed at home.

That said, given how beaten-up China’s economy is, it is safe to say that China’s recovery will be highly likely as they are starting from a low point. What is absolutely necessary is for the CCP to take actions that will revive its consumer, business and investor confidence. Once that happens, it will greatly increase the efficacy of their current policy stimulus thereby prompting economic growth to accelerate further.

On one end, China’s reopening is good news for investors in Asia as it could provide some fresh momentum in Asia’s demand, especially at a time when the U.S. and European economies are slowing.

On the other end, China’s reopening is expected to contribute to higher inflation rates as the pent-up demand in China will compete for the limited number of goods around the world thereby keeping prices at an elevated level.

At the moment, Chinese households are holding RMB 116.5 trillion in deposit accounts, 42% higher than the pre-COVID-19 level. Should this demand be released as the economy reopens, the spillover effects to other Asian economies would be a welcome source of growth while the higher prices will be a nightmare for economies combating high inflation rates, especially those in the west.

3. Higher for Longer (Interest & Inflation)

The third big theme of 2023 is the behaviour of the inflation rates and interest which are expected to persist at higher levels for a longer duration.

On the topic of inflation rates, while inflation rates have indeed started to trend down based on the figures, we had in 2022, I foresee the inflation rate to remain at higher levels for a longer duration as:

Firstly, with China’s reopening that is set to happen in the second quarter of 2023, I believe that the gradual return of Chinese consumers will prop up prices which will offset the slow in demand as a result of a possible recession.

Secondly, based on historical data, inflation across advanced economies has taken an average of 5 years to return to 2% once it breaks above 5%. Inflation will likely take much longer than expected to moderate.

On the topic of interest rates, based on the Federal Reserve’s stance, interest rates are expected to peak around march but stay higher for almost the entirety of 2023 before coming back down in 2024.

Looking at how the inflation situation would be, I believe the current forecast of interest rate behaviour is likely to materialize.

Implications To Us Investors

Looking at the current market valuations and what is expected to come in 2023, I believe that the market still has more room to fall as the market has yet to price in the impact that a recession will do on the earnings of businesses.

On the side of the developed market, which will be represented by the S&P500, valuations today are still trading at elevated levels as compared to the long-term average. What this means is that even without an earnings revision, there is more room for prices to come down for valuations to go back to normal levels.

Even if valuations were to remain elevated, for us to maintain the valuations that we are experiencing today while having a low and lower earnings figure, prices will have to come down which builds on the case of why there is more pain to come for the general markets as a drop in the US market will inevitably spill over to other parts of the market.

That said, the risk of a structural failure like that of 2008 in the US is low as the US currently has a healthy balance sheet for both households and the corporate sector which was helped by the deleveraging efforts since the global financial crisis and fiscal packages in 2020 and 2021.

On the side of the developing market, which will be represented by the Asia equities, valuations are currently trading below the long-term average and as such it presents an opportunity to participate in the growth of these developing countries at a discount.

That said, while valuations may be cheap and while the tailwinds of China’s reopening will give the developing markets a boost, the high correlation of the developing markets with the US markets may result in a further drop in Asian equity prices despite it being undervalued.

I’ve gone through the financial modelling and fundamental analysis of the expected annual rate of both the US and Asian equity in my 2022 portfolio update post so go check that out if you are curious about the fundamental analysis side of things.

Actions

As investors, there is no better time to accumulate our investments than when the prices are falling the back of fears and pessimism.

Should the global economy enter into a recession, it will be a pivotal moment for the markets as the mindsets of investors, businesses and consumers will shift from battling the uncertainty of whether a recession would occur to anticipating the economic recovery that is bound to happen.

Most of the time, stocks would bottom about six months before the economy and the early-recovery phase of an economic cycle is one that typically presents the strongest return prospects based on market history.

That being said we should embrace the pain that is bound to happen in 2023 and accumulate as many discounted investments as possible to position ourselves for the eventual recovery.

The next 18 to 24 months will be rough for the markets as prices remain depressive but as long as we can get through this period, which we will eventually, we will look back at this episode as a plausible opportunity for the next decade.

If you do not know how to get started with your investments or if you do not have the time to manage your investments, you can consider engaging an Independent Financial Advisor who can help you make sense of the market and shortcut your investment planning process.

To find out more information about how you can benefit from my financial and insurance planning services, you can check out what I do on my website here:

Or reach out to me directly via:

Daniel is a Licensed Independent Financial Consultant with MAS and a Certified Financial Planner (CFP®).

Connect with me on social media platforms to receive updates on future content! You can also slide into my DMs if you have any questions :)

Disclaimer:

This article is meant to be the opinion of the author

This article is for information purposes only

This article should not be seen as financial advice

This advertisement has not been reviewed by the Monetary Authority of Singapore