2023 financial outlook – first pain, then gain

Herman van Papendorp

Herman van Papendorp, head of investment research and asset allocation at Momentum Investments, said people should prepare for more pain, and then gains, in 2023.

He said the interplay between inflation, interest rates, and economic growth is likely to determine global asset class returns in 2023.

“In the absence of further energy or supply-chain shocks, it currently seems likely that global inflation should fall in 2023, led by the United States,” he said.

A slowdown in global economic activity in 2023 seems almost inevitable in reaction to previous policy tightening and the erosion of real spending power.

However, the magnitude of the growth slowdown remains uncertain.

A mild slowdown, or so-called soft landing, is still possible, but more indicators, particularly inverted yield curves, are pointing to the increased probability of a global recession next year.

“Global equity markets could be under pressure during the larger part of 2023 as they deal with the potential for recessions and the final phases of rate tightening,” Van Papendorp said.

“However, there could be some relief for equities towards the latter part of the year as markets start looking beyond the downward growth cycle and begin discounting an eventual Fed pivot to lower interest rates.”

Fundamentally, the anticipated combination of falling inflation and slowing economic growth, with a meaningful risk of recession, should be supportive of the US bond market in 2023.

It could re-establish the hedging benefits of having government bonds in a diversified global portfolio, particularly during potential equity drawdown periods.

The significant runup in bond yields in 2022 has once again made fixed income a viable income-providing alternative to equities and made US government bonds look cheap versus US equities.

Although global property fundamentals remain solid and the asset class looks cheap against equities, its expensiveness against fixed-income assets erodes its relative attractiveness.

“South African equities have an attractive valuation underpin, both within the global universe and against its own history,” he said.

“This should stand it in good stead during potential global equity drawdowns, but particularly during subsequent recoveries when global risk appetite rises.”

South Africa’s real bond yields are also attractive against their own history and relative to those in global markets.

Part of the high real yield differential is due to a fiscal and country risk premium.

“We expect falling inflation in the coming year to become less supportive for inflation-linked bonds,” he said.

“The prospective SA real cash yield has been rising from a low level in line with policy rate increases and is now only slightly below its historical average.”

Although South Africa’s listed property operational metrics are improving, they remain worse than in the pre-COVID era.

The potential for meaningful listed property returns upside from undervalued levels needs to be weighed against some remaining negative fundamental factors.


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