Looking ahead to 2023, forecasts suggest that the fight against inflation needs to persist, and policymakers will be likely to continue to raise interest rates to lessen the inflationary push from elevated demand.
Modelling anticipates a 40% chance of a recession in Australia, a base case scenario that is far lower than the 90% odds placed on US, UK and Euro area recessions. This is because inflation and wage pressures have affected many Australians, we are, relatively speaking, in a better position than many other developed economies, thus interest rates need not rise as much.
Australia also stands to benefit from a cyclical rebound in China, and as a net exporter of commodities given elevated commodity prices.
Vanguard projects growth in 2023 to be very weak or slightly negative in most major economies outside of China. Unemployment numbers will likely rise, but probably nowhere near as high as during the 2008 and 2020 downturns.
And as a result of job losses and slowing consumer demand, a downtrend in inflation is likely to persist through 2023.
Returns in equity and fixed income markets
In Australia, some are predicting the cash rate to reach 4.35% by mid-2023, higher than currently anticipated by markets and economists, given the RBA’s strong desire to quash inflation.
The rapid and continued interest rates rises have been painful in the near-term, but higher starting interest rates have raised return expectations significantly for global bonds.
It’s now expected Australian bonds to return 3.7%–4.7% per year over the next decade, compared with the 0.9%–1.9% annual returns forecast a year ago.
Forecasts for global bonds to return 3.9%–4.9% per year over the next decade, higher than compared with our year-ago forecast of 1.3%–2.3% per year.
Here is Vanguard’s economic forecasts:
Source: Vanguard
In equity markets, Vanguards view is a fall in valuations means the outlook has also improved.
From an Australian dollar investor’s perspective, the rolling 10-year forecasts project higher 10-year annualised returns for ex-Australia markets (5.6%–7.6%) than for Australian equities (4.5%–6.5%).
Outside of Australia, equity return expectations are 2.5 percentage points higher than they were at this time last year.
To adjust or to stay the course?
2022 has been trying, even for the most experienced of investors. The good news is that both equities and fixed income are now a lot more attractively priced than where we were at the end of 2021— in our opinion.
Investors thinking of implementing portfolio changes based on the likelihood of a possible recession in Australia – and elsewhere – should consider maintaining a focus on their long-term investment plan if their long-term goals have not changed.
For some, forecasts about possible recessions could very well change short-term financial goals and plans – and thus asset allocation decisions should be made accordingly. But for those with a long-term horizon, the rolling 10-year asset class return outlooks should be used to help set realistic expectations and to inform a long-term plan, rather than spur tactical decisions over the short-term.
Afterall, the truism that “time in the market” beats “timing the market” is rooted in the basis that being fully invested tends to outperform sitting on the sidelines while waiting for the market to bottom.
Markets are generally forward-looking and a 2023 recession is already in part reflected in asset prices. Thus, re-allocating assets based on forecasts such as these are unlikely to bear fruit unless the outlook deteriorates further. And, needless to say, market timing is challenging, even for professional investors, given the difficulty of consistently predicting market moves while keeping transactions (and associated costs) down.
Regardless of whether Australia lands in recession territory, or whether bonds and/or equities continue to contract in 2023, reacting to current events and using short-term portfolio performance as a focal point to make investment strategy decisions can be detrimental for investors—in our view.
Knowing when the market will hit the bottom is difficult. Because valuations are now more attractive, those who stay invested in the market are more likely to be rewarded when the volatility ebbs.
Source article: Alexis Gray, Senior Economist, Vanguard
Fidelity’s CEO, Anne Richards, and Global CIO, Asset Management, Andrew McCaffrey, sit down to discuss what’s happening in global markets at present and what the implications are for 2023.
Source: Fidelity
