After a tumultuous 2022, investors must be prepared for even more uncertainty next year. Here are three ways to frame your thinking.
If you accept 2022 was an inflection point for the global economy and financial markets – war in Europe cementing a switch from globalisation to nationalism and the urgency of the energy transition, the highest inflation for generations and the end of 40 years of falling global interest rates – then it stands to reason that 2023 will be the year these chickens come home to roost.Investors likely need to accept that markets will remain obsessed with central banks.
This may prove optimistic; as Bank of America strategist Michael Hartnett points out, if rising rates simply force key indicators to revert to long-term averages – US unemployment is at 3.7 per cent compared to the average of 6.2 per cent over the past 50 years, while corporate debt default rates are at just 1.5 per cent, compared to an average of 3.8 per cent since 2005 – the real economy may be in for a rough ride.
“Unlike the 1990s-2000s, we maintain that investors now reside in a world where the pendulum between growth and recession, inflation and disinflation, oscillates more violently than in the past,” Shvets says. He doesn’t believe earnings will collapse 50 per cent like they did in the GFC, but he does see pain ahead that will hit share prices in a way the market doesn’t expect. “The earnings bubble hasn’t popped yet.”
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