The dynamic year end outlook

‘It’s tough to make predictions – especially about the future’ attributed to Yogi Berra.

• It’s been a tough year for markets and portfolios
• Many 2023 forecasts are now irrelevant given US inflation and the Fed decision mid December
• We stay nimble to continually assess our views, and are ready to change with data and markets
• Expect the unexpected in 2023 with more risk when consensus lines up with the same view
• Long term returns look more attractive this year than last year based on the starting valuations
• Having a long term portfolio plan with some private markets helps smooth the journey

 

In a tough year for equity markets there has been a lot of volatility and some poor returns, with the worst on record for bonds, deep negative returns in offshore equities, particularly the tech heavy US Nasdaq, and a retreat in listed real estate investment trusts (REITS). A surprise for most will be that the Australian equity market is actually up slightly year to date mid December on a total return basis including dividends.

The year ahead could well be as difficult as this year as we have a strong consensus view for a US and Australian recession. The US S&P 500 equity index is forecast by broker analysts to have a negative return in 2023, the first time in decades there is such a negative view.

Such a dire view is offset by the recent easing US inflation data and the Federal Reserve view which has just hiked 0.5% to 4.5%. The inflation print and the Fed’s decision and forecast of 5.1% terminal cash rate makes a lot of the broker and fund manager 2023 outlooks out of date. There may only be one 0.5% move and the Fed is on hold or maybe one more small move after that. Fed Chairman Powell reiterated that the Fed is likely to maintain a peak cash rate for an extended period. Hence, we aren’t going to make heroic point in time 2023 year end forecasts as there is a lot of uncertainty on the path forward. As the data evolves we will keep reviewing our position.

So where are we in the market cycle and how should we be positioned? Our recent video message indicated that we still think that there is more downside to come in markets in the year ahead. This is driven by the still very restrictive conditions set by the Federal Reserve and RBA which slows activity in the markets. As equity and bond markets quickly discount the future, and have the ability to look through the economic cycle, there is a risk that positioning that is so negative can turn the other way and support a further rally.

Our portfolios are positioned conservatively on our central view, however we are continually testing this thesis as the market and economic data evolves and we are alert to a change in investor positioning. Therefore our core view will be to stage a sensible stepping back into a neutral equities position which may evolve faster or slower depending on data flow. We believe bonds will become a better diversifier in 2023 as inflation becomes more subdued, with higher starting yields able to absorb most of any rise in yields from credit stresses.

We will have our usual quarterly outlook in late January based on the year end finish and initial positioning in 2023. As we finish the year, we also think about long term cycles and themes. We are expecting more  inflation and interest rate volatility over the next decade and some shift in investment style performance given likely persistently higher interest rates. We believe there are plenty of ‘picks and shovels’ opportunities and sensible investment niches to play in public and private markets in the years ahead. One theme we are consistent on is the attractiveness of middle markets in each asset class and private markets. We will address this in our private markets outlook diving deeper into alternatives.

 

Have a safe and restful holiday season with family and friends.

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This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider you financial situation and needs before making any decisions based on this information. Bentleys Wealth Advisors, trading as Partners Retirement Planning & Investment Advisors, is a division of Partners Wealth Group and an authorised representative of Charter Financial Planning Limited, Australian Financial Services Licensee.