The outlook for financial markets in 2023

20th December 2022

Innes Reid Founder, Mark Reidford APFS reflects on the outlook for financial markets in 2023.

For those of you who have read my previous year-end messages you will know that I don’t like to look backwards as I think it is much more interesting and useful to look at what might happen rather than what already has!

I am going to have to break from the norm as I need to provide a degree of commentary on 2022 for no other reason than to set the scene for 2023.

2022 was quite a year for the global economy.

But there again so were 2020 and 2021; the COVID years!

Inflation was spiking almost everywhere and central banks had to admit that it would not be “transitory” but one that would potentially worsen and linger. Central Banks started raising interest rates in an aggressive manner to stand any chance of subduing the perils of inflation. But that, heightened another risk; recession, and that was considered to be more of a danger than inflation.

Then the Russians invaded Ukraine bringing about awful social and humanitarian strife. It also turbo charged the economic issues at hand; supply chain shortages worsened, energy and food prices jumped and inflation surged.

It was around this time that central banks realised inflation was close to being embedded and changed their view to be that inflation was the greater risk, not recession. In essence a long period of high inflation would do more medium and long-term damage than recession.

“There is only really one blunt tool to tackle inflation and that is to put interest rates up, which is what has happened, on a record-breaking scale.”

As a result, there has been nowhere to hide for investors and in fact, 2022 was one of only three years in the past century where equities and bonds fell at the same time, the other two years being 1931 and 1969. Bonds are usually considered to be lower risk than equities therefore their decline in value has been particularly painful for investors with a lower risk approach as they may well have lost more money than those with a higher risk profile.

Then in September the whole world was looking at the UK, our politics, economy and bond market.

The unstable political backdrop was thrown into chaos and driven by what was described as a “mini” budget. Its ramifications were anything but mini! Thankfully, action was taken quickly, and the situation stabilised. Although we are not out of those woods yet.

With the economic outlook in mind, 2023 will, no doubt, be quite a year as well.

The word that is getting used more than most to describe the outlook for economies and markets in 2023 is “uncertain”, I am not 100% sure but I think that is as good a word as any. Obviously, we never know what is going to happen, but we can have a view on what we think might happen; so, let’s have a go at that.

Innes Reid portfolios are truly diverse and they embrace the global market. And with this in mind let’s take a quick look at what we can expect;

The US is the world’s largest and most important economy, it is a key driver of what happens elsewhere and it appears, for now to be in pretty good shape. There is hope that inflation may have peaked, that we can look forward to a slowing pace of interest rate increases, with the peak currently expected to be in the second quarter of 2023, and that the economy may only go into a mild recession; that would be considered as a great outcome.

China

Next up; China. COVID induced lockdowns, a highly stressed property sector and tightening regulations may cause the economy to slow at concerning pace, which is not good news. Indeed, the current social unrest can only exacerbate the problems. It has become fashionable to see China as a country in trouble. Do not underestimate its impact. In the wake of the Global Financial Crisis, it was the extensive stimulus (mainly fiscal) from the Chinese government that pulled the whole global economy out of recession.

Eurozone

In the Eurozone, the outlook has improved as it now appears energy rationing will not be required and forced shutdowns of energy-intensive industries are unlikely. That said, a recession still appears unavoidable. In addition, more European Central Bank (ECB) tightening seems likely given the labour market pressures – unemployment rate is the lowest since the start of the common currency.

In the UK, a prolonged recession appears likely, as monetary tightening, fiscal tightening, the energy price shock and supply-side constraints from Brexit combine to create a challenging outlook. GDP (gross domestic product) has yet to regain pre-COVID-19 lockdown levels, but labour-supply shortages have driven the unemployment rate to the lowest level since 1973.

Japan

In Japan, the country is set for a year of softer economic growth in 2023. Domestic demand is weakening and there is slowing demand for Japanese exports. Unlike the rest of the world, Japan is still operating below capacity, which means it doesn’t face the risk of monetary overtightening.

Can 2023 be a better year for financial markets?

“The backdrop is not great, caution is the watchword, uncertainty abounds.”

It’s been a tough 3 years globally for society and the economy. In economic terms 2023 will be tough as well. In the months to come we will need a positive jolt of some description, whether that be confirmation of inflation peaking or central banks no longer hiking rates or, indeed, a resolution to the tragic war in Ukraine, and – of course – a milder-than anticipated recession.

Even with the decline already seen in the price of both equities and bonds, we still anticipate 2023 will be another difficult year, though as we go through the year, the situation should improve and the outlook may get better as well.

My thoughts above are predicated on avoiding spiralling wage inflation and geo-political matters in Ukraine and China not escalating and caveated by the fact that I may well be wrong!

As always, if you have any questions about your own personal finances do not hesitate to get in contact with your adviser. Alternatively if you are new to financial planning and would like a free, no obligation consultation simple get in touch using the form below or call 01244 347 583 to speak to our team.

The outlook for financial markets 2023 – This article is not personal advice. If you are unsure what is right for you, please seek personal financial advice.

Source: Financial Express