Head of Private Clients, James Johnsen looks ahead to what we could see in markets over the course of the next twelve months.
At the risk of joining the shoals of armchair analysts and their predictions for 2023, here are a few things investors may see from markets in 2023:
Rising interest rates
While the Bank of England raised rates last month by 0.5%, they remain at levels that appear low by comparison to the levels we got used to in the 1980s and 90s but much higher on a ten-year perspective. They are likely to rise further this year until inflation abates. Markets currently anticipate their peaking in the 4% to 4.5% range. Interest rates essentially set the cost of capital; while this obviously impacts borrowers, both corporate and individual, higher rates benefit savers and investors who will finally see their interest income improving. The price of rising rates, however, especially if hiked too high or too fast, is…
A deepening recession
but probably unlike those previously endured. This one is unlikely to be characterised by massive unemployment (as in the early 1980s) or a thumping property crash (as in the 1990s). But the combination of rising interest rates (which depresses activity), inflation (which increases the costs of goods and services), and declining ‘real’ earnings, (which decrease purchasing power) will inevitably depress essential activity in the economy.
especially if geo-political events and newsflow surprise. However, volatility can include upside swings too. Imagine if, by some miracle, the Russia-Ukraine situation was resolved, or President Xi Jinping suddenly showed more restraint, or even if Governments combined to regulate social media into impotence, who knows how markets could react? Wishful thinking, however, there is no substitute for…
companies with resilient earnings profiles, strong franchises, low levels of debt, and high returns on capital will survive better in weak markets and benefit first when recovery emerges. As Warren Buffett famously commented, “only when the tide goes out do you discover who’s been swimming naked”. In other words, prepare for rising default rates, dividend cuts, and earnings downgrades among weaker companies, which often accompanies…
Increased corporate raiding
UK Plc’s vulnerability combined with sterling weakness, especially against the dollar, will doubtless see higher levels of corporate activity, especially from the USA and private equity funds eagerly searching for companies trading at low valuations or trophy assets that look too far discounted below long-term trend values. Takeover activity and share buy-backs underpin share prices and often presage…
while the ‘doomsters and gloomsters’ currently reign supreme in the media, markets look further out than the commentariat realise and catch over-cautious investors on the hop. Portfolio performance is often heavily skewed by single good days in the market. Miss out on these and one can underperform quite significantly. For portfolios that are sensibly structured, it pays to remain invested and avoid trying to ‘time’ the markets.
The second half of 2023 could see the worst of the bad news behind us.
The contents of this article are for information purposes only and do not constitute advice or a personal recommendation. Investors are advised to seek professional advice before entering into any investment arrangements.
Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.