As noted last week 2022 was a very disappointing year for investors. The typical diversified investment portfolio lost about eight per cent according to research firm Lonsec. The main cause of the problems was the fastest interest rate increases since 1994 to combat accelerating inflation.
The Russian invasion of Ukraine also caused disruption to energy supplies with shortages in many countries, especially those that have been closing their coal fired power stations.
Even fixed interest securities such as government bonds lost money as rates rose. The changes in bond values as interest rates move are usually very small, but with rates rising so rapidly the losses were significant.
Fortunately the investment outlook for 2023 is much better. Inflation is peaking. US inflation for the year to December was 6.5 per cent, down from 9.1 per cent for the year to June. In Europe it has fallen from 10.6 to 9.2 per cent. Australia’s inflation is flat lining at 7.3 per cent.
Confirmation that inflation has peaked will allow the Reserve Bank to stop raising interest rates. They may go up another 0.25 per cent but that should be the top. That will remove the uncertainty of the earlier stages of the rate rise cycle.
Financial markets don’t like uncertainty. With rate rise fears eliminated businesses can better plan projects and make decisions. China’s abandonment of its zero-Covid policies is likely to see its economy grow strongly, boosting demand for Australia’s raw materials.
Before Covid, educating foreign students was one of Australia’s major export earners, but that almost completely stopped. Now foreign university students are coming back in huge numbers for this new year.
Company profits for the last financial year were mostly better than expected with some surprisingly good. Many share prices are quite reasonable relative to the profits the companies are making. Shares appear good value. Miners and agricultural commodity producers should do well with demand already strong.
Stock market listed property businesses recorded severe losses last year but they should recover as rents jump in line with the CPI clauses in their tenants’ leases. Interest rates at their peaks will prevent further losses in bonds and see them making higher interest payments.
Some commentators think central banks may push rates too high, causing a recession. That seems unlikely in Australia with the RBA focused on choosing just enough increases but not too many. The US should also avoid a recession, though Europe is less certain. Any slowdown here is unlikely to be serious.