Some optimistic signs for 2023

] with andrew Wyllie, Forsyth Barr

Early 2023 has provided tentative signs that the end of interest rate hikes might be in sight. Inflation data has shown some respite from endless price increases, while global labour markets are starting to show signs of increasing slack and a reducing pace of wage growth.

These factors mean that central banks can take their foot off the brake slightly and slow the pace of rate hikes.

Looking at

Expectations are for rates to peak by mid2023. As the peak in interest rates gets closer, markets are now starting to bet on when interest rates will start going back down. Talk of an economic ‘soft landing’ persists, but risks remain.

Negatives turning

After a strong bounce in the 18 months or so post the COVID crash, in 2022 we suffered the hangover from the withdrawal of substantial government and central bank economic support, rising interest rates to combat soaring inflation, a commodity supply shock after Russia invaded Ukraine, and China’s tight zero-COVID restrictions and property slump.

Several of these negative factors have now abated or turned positive:

• Inflation appears to have peaked for most developed economies and, although it generally remains above central banks’ targets for now, is now heading lower.

African love grass

This gives central banks some breathing room to slow the pace of rate hikes, with most central banks expected to pause increases in coming months. This has buoyed stock market sentiment as higher interest rates tend to weigh on both stock prices and earnings.

• There has been some relief from the commodity shock driven by the war in Ukraine. Energy prices in Europe have fallen back from being up +40% year-onyear to around +17% in January. European natural gas prices have returned back to levels seen prior to Russia’s invasion of Ukraine as countries have diversified their energy supplies and aided by a milder winter. Food prices have also declined from peaks seen last year (albeit, they remain above pre-war levels).

• China’s economic re-opening has been a significant positive since December and the expectation is that this will provide a decent boost in demand for Australasian exports, especially in the near-term.

The anticipation of increased economic activity in China has driven the price of industrial metals (such as copper, tin and iron ore) sharply higher in the past few months. The Chinese economy is now expected to grow by a solid 5.2% in 2023 based on the latest forecasts from the IMF, a big upwards revision from its previous forecast of 4.4% growth.

Remaining on the challenging side is the ongoing decline in global property markets in response to rising interest rates. Declining house prices remain a risk to household confidence and spending.

So far this appears to have been reasonably well offset by strong labour markets and pent-up demand and savings still flowing after post-pandemic lockdowns.

Consumers in focus

Through Covid-19 lockdowns, global consumers accumulated savings and pent-up demand for experiences such as travel and dining out.

We are still seeing the flow-on effects from this in the solid rebound in inbound tourist numbers here in New Zealand and it’s a similar story internationally. As those savings get run down, spending will become much more reliant on real wage growth and wealth effects.

Both of these factors generally point toward a somewhat more cautious consumer in the year ahead.

Sky-high infl ation (although abating) has increased the cost of everyday goods while wage increases are struggling to keep pace.

House prices (which have an impact on people’s feeling of wealth and propensity to spend) continue to head south in New Zealand and most other developed economies. Maintain an even keel

While 2023 has set off on a more constructive path, there will undoubtedly be external shocks and some bumps in the road as markets manage the transition to more subdued growth and higher interest rates in coming months.

The potential for interest rates to start declining again from late 2023/early 2024 could be helpful for equity markets, but it will depend on what drives interest rate cuts.

Assuming inflation comes gently down and economies remain solid then, all else equal, that should be positive for equities.

The risk remains that inflation and interest rates get driven lower by a sharper contraction in economic activity which would be a negative for equity markets.

As we’ve experienced in recent years, external shocks and surprising data can alter the investing landscape quickly.

It remains important for investors to be flexible and prepare to navigate a range of potential outcomes in the year ahead.

This article was prepared as at 31 January 2023 and provides market commentary for the three-month period ending on that date.

We appreciate that market volatility and economic uncertainty doesn’t make an easy backdrop for investors.

To discuss your investment options please contact andrew Wyllie, who is an Investment adviser and is Forsyth Barr’s christchurch Branch co-Manager. he can be contacted regarding portfolio management, fixed interest, or share investments on 0800 367 227 or andrew.wyllie@ forsythbarr.co.nz

This column is general in nature, has been prepared in good faith based on information obtained from sources believed to be reliable and accurate, and should not be regarded as financial advice.