Shane Oliver | AMP Capital
After very strong returns in 2021 thanks to reopening from COVID restrictions and stimulatory fiscal and monetary policies, 2022 was a rough year reflecting high inflation, a surge in interest rates and bond yields, geopolitical issues (notably the invasions of Ukraine) and recession worries.
This saw average balanced growth super funds lose around 5% (or around 12% after inflation), as both shares and bonds lost value, after returning 14% in 2021. Over the last five years, they have returned around 5.5% p.a. with a pattern of successive strong followed by weak years, etc, since 2017.
Will the poor returns continue, or can we expect a rebound? Here is a simple point form summary of key insights and views on the outlook.
2022 was not so good and economic growth will slow sharply this year thanks to rate hikes and cost of living pressures (with a high risk of recession in the US and Europe), but there are several reasons for optimism.
1. Long-term inflation expectations remain low – while they were a bit slow initially central banks swung into inflation-fighting action with rapid rate hikes and tough rhetoric showing they learned the key lesson of the 1970s – which is to keep inflation expectations down.
2. Inflation has likely peaked – this is most evident in the US where inflation led on the way up and is likely now leading on the way down. US inflation peaked mid-last year and our Pipeline Inflation Indicator points to a sharp fall ahead. Labour market tightness is showing signs of easing which should take pressure off wages – this is flowing from slowing demand and in Australia will be helped foreign workers returning.
3. Key central banks have likely seen or are close to peak hawkishness – this flows from the likely fall in inflation and signs of cooling demand.
4. China’s move away from zero COVID will provide an offset to weaker US and European growth – albeit after an initial setback as new cases surged, much like they did in other countries that reopened.
5. The US dollar looks to have peaked – which should ease debt servicing pressure in emerging countries with US dollar-denominated debt.
6. Vaccines, anti-virals and with less harmful mutations have allowed the world to start moving on from COVID. China is now playing catch-up.
7. In Australia, the less aggressive RBA along with other factors (see below), should help us avoid recession.
8. Geopolitics may not be as threatening. Western democracies united and authoritarianism/strongmen leaders took a hit in 2022 – with Putin weakened by the mess in Ukraine, China’s difficulties exiting zero-COVID and Trump on the nose after the US mid-terms. The war in Ukraine may not get any more threatening, there are signs of a thaw in China relations and there are no major elections in key countries in 2023.
9. While US mid-term election years are often poor for shares (as seen in 2022), the 12 months after the US mid-terms are normally strong.
A slump in consumer spending (thanks to rate hikes, cost of living pressures and falling property prices) along with weaker global growth will see Australian growth slow to around 1.5% this year. The risk of recession is high, but it’s likely to be avoided.
Easing inflation pressures, central banks moving to get off the brakes, the anticipation of stronger growth in 2024 and improved valuations should make for better returns in 2023. But there are likely to be bumps on the way – particularly regarding recession risks – and this could involve a retest of 2022 lows or new lows in shares before the upswing resumes.
Global shares are expected to return around 7%. The post-mid-term election year normally results in above-average gains in US shares, but US shares are likely to remain a relative underperformer compared to non-US shares reflecting higher PE multiples. The $US is likely to weaken further which should benefit emerging and Asian shares.
Australian shares are likely to outperform global shares again, helped by stronger economic growth than in other developed countries and ultimately stronger growth in China supporting commodity prices helped by the grossed-up dividend yield of around 5.5%.
Bonds are likely to provide returns around the running yield or a bit more, as inflation slows and central banks become less hawkish.
Unlisted commercial property and infrastructure are expected to see slower returns, reflecting the lagged impact of weaker share markets and higher bond yields on valuations.
Australian home prices are likely to fall another 9% or so as rate hikes continue to impact, resulting in a top to bottom fall of 15-20%, but with prices expected to bottom around September, ahead of gains late in the year as the RBA moves toward rate cuts.
Cash and bank deposits are expected to provide returns of around 3%, reflecting the backup in interest rates through 2022.
A rising trend in the $A is likely this year, reflecting a downtrend in the overvalued $US, the Fed moving to cut rates and solid commodity prices helped by stronger Chinese growth.
While investment returns should improve, volatility is likely to stay high.
All prices and analysis at 17 January 2023. Livewire gives readers access to information and educational content provided by financial services professionals and companies (“Livewire Contributors”). Livewire does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) in respect of any advice given.
This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.