Quarterly economic update: Oct – Dec 2022

2022 in review

2022 was a turbulent year for financial markets, with the war in Ukraine, and high inflation and rising interest rates being the key factors. This affected growth markets such as shares and listed property, as well as the normally defensive bond markets, resulting in negative returns for most major asset classes (excluding cash).

Relative to US, Asian and European markets, the Australian share market was relatively resilient, thanks to strong commodity prices and (believe it or not) a less aggressive central bank. Asian shares generally and Chinese stocks in particular were affected by China’s zero Covid policy, as well as concerns over a possible Taiwan invasion.

While financial markets lifted in the December quarter, most diversified portfolios still finished the year with single-digit negative returns.

Australian events

As mentioned, the Australian economy was somewhat cushioned by strong commodity prices, but this was outweighed by inflation and global events. Inflation, which already rose in 2021, surged to levels not seen for decades, largely reflecting pandemic related distortions to supply and reopening, a stimulus driven surge in demand, as well as major flooding events.

The Reserve Bank has now raised official rates a full 3% p.a, with potentially more to come. While economic growth has still been healthy, and unemployment still very low, residential housing prices have softened significantly, and it is hoped that upcoming inflation figures will show that the RBA has had some success in their attempt to curb inflation, paving the way for a pause in any further interest rate rises.

While some borrowers are feeling pain (or facing it when fixed rates roll to variable), few analysts are expecting widespread mortgage defaults, pointing to the build-up of large financial buffers through the pandemic, continued strong labour markets and earlier house price gains, all acting to help homeowners get through the coming year.

Nonetheless, the expectation is for further downward pressure on property prices through 2023, with most analysts predicting a 15 to 20 per cent fall in national house prices from peak to trough with impaired or unrenovated properties experiencing even greater price falls.

Company profits are expected to remain strong through 2023, driven mostly by strong export prices, and the return of immigration is likely to help our labour market.

Global events

The United States economy, typically the powerhouse of the world economy, is almost certainly expected to fall into recession later in 2023, with domestic economic growth expected to fall to a lacklustre 0.5 to 1 per cent for the calendar year of 2023.

The Chinese economy is still struggling with the continuing impact of the pandemic with reported cases of Covid 19 soaring as winter takes its grip on the country, causing factory shutdowns and with that, a fall in exports. However, we have seen them rebound strongly in the past.

In the United Kingdom, inflation peaked at 11.8 per cent in October 2022 and is expected to remain in double digits for some time as higher energy prices, interest rates and general cost of living increases cause widespread price hikes around the nation.

While the Bank of England is doing its best to bring inflation under control, there is widespread resentment that it is the poorest and most vulnerable in the community that are paying the highest price for the nation’s economic woes. A situation made worse by the slowdown in economic activity in Europe generally, as the ongoing war in the Ukraine continues to take its toll, driving energy prices higher and causing massive economic dislocation.

The outlook and implications for investors

While inflation and sluggish major world economies on the surface suggest a tough 2023, don’t forget that share markets are forward-looking. It is quite likely that we are at or near the peak of both inflation and interest rates, so there is room for continued growth beyond the late rebound in 2022.

We remain “cautiously optimistic” and in light of the above factors, continue to suggest a diversified, long-term approach will produce results over time.

Economic indicators – 31 Dec 2022  1 year % excluding dividends
Australian Shares -1.1%
Global Shares (hedged) -17.7%
Global Shares (unhedged) -12.5%
Australian Property Securities -20.1%
Australian Bonds -9.7%
Global Bonds (hedged) -12.3%
Cash 1.3%

Published : 30 Jan 2023

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