How to invest in 2023

2023 promises to be a tumultuous year for investors, with the US economy potentially entering a recession, inflation proving persistent, and geopolitical tensions increasing. Investors should avoid short-term noise and focus on long-term returns.

This is feedback from FNB’s head of investments, Renzi Thirumalai, who spoke to Daily Investor about the factors impacting economic performance and investment trends in 2023.

Local and global stock markets got off to a hot start in 2023, with the JSE All Share up 9.72% by mid-February, the S&P 500 rising 6.96%, and the Nasdaq increasing by 14.14%.

However, there has been a significant pullback since then, with economic data indicating that developed economies, particularly the US, may need higher interest rates for longer.

Thirumalai said investors should pay specific attention to the health of the US economy.

Naturally, the performance of the world’s largest economy will have an outsized impact on global growth and macroeconomics.

A US recession in 2023 is likely, said Thirumalai. However, the nature of the recession – how deep it is and how long it lasts – is more important and will dictate the stock market’s performance.

A recession in the US will temper global demand for goods and services, but, more importantly, US economic performance will dictate interest rates in 2023.

Thirumalai pointed to this as the second-factor investors should be aware of in 2023 – inflation and interest rates.

There is still uncertainty about when interest rates will peak in the US, particularly with the economic performance likely to determine the Federal Reserve’s terminal rate.

Thirumalai expects inflation to peak around 7% in South Africa and be below 6% by the year-end. The South African Reserve Bank’s (SARB) terminal rate should be around 7.5% in this case.

This is partly due to SARB’s proactive approach to tackling inflation and the decline in oil prices during the second half of 2022.

Thirumalai tempers the optimism by pointing out that SARB must be cognisant of the Federal Reserve’s rate hikes in 2023 to ensure that the Rand remains competitive and does not fall behind.

The third major factor Thirumalai says investors should note is geopolitics, particularly the war in Ukraine and the reopening of China’s economy – the effects of which are unclear.

A year like no other

Thirumalai urged investors to focus on long-term investing and avoid short-term noise in this particular environment.

Investing in 2023 is unique for Thirumalai, with interest rates being at multi-decade highs globally and monetary tightening occurring significantly for the first time since the early 2000s.

Economic data and market performance are likely to remain volatile throughout 2023, making it hard to predict which investment approach will perform best.

Investors should stay close to their neutral point to manage the volatility, as this is likely to perform well over the long term.

Equities should still make up the majority of investors’ portfolios, between 60-70% and fixed income in the form of bonds, money market instruments, and cash make up the rest.

Fixed income will perform well in 2023, with interest rates remaining high.

Investors should be overweight local equities as they remain attractively valued relative to their global peers.

On the other hand, the US market is relatively expensive compared to its historical averages, while Europe and emerging markets offer good value.

Thirumalai says, “different views make a market”, and so investors should actively listen to views that contradict their own while doing their own research.