Economy may feel grim, but not all is doom and gloom for investors.
If the story of 2022 was how fast inflation rose, in 2023 it may be how fast it fell, a leading investment analyst believes.
“While we need to acknowledge and empathise that 2023 is going to be a challenging year, the outlook isn’t all doom and gloom for investors,” says Andrew Bascand, Managing Director of Harbour Asset Management.
He says there are enough signals to indicate inflation has reached a peak - and that mortgage interest rates may have hit a ceiling. This suggests New Zealand is creating the sort of economic platform that is likely to see it avoid a ‘1970s period of misery’ when persistently high inflation meant there were no rewards for saving or investing.
“Twelve months ago I would have said maybe we won’t avoid similar misery, but we are now seeing a much stronger economic foundation in place that should provide investors with better rewards over the next two to five years.”
But Bascand acknowledges that it might feel very different for around a quarter of Kiwi households currently facing both higher mortgage interest rates and cost-of-living pressures.
“Because we don’t know how householders are going to react to higher mortgage rates, the next six to 12 months might result in a deeper recession than was expected; I would think that is a plausible scenario.
“This will remain a challenge in 2023, but investment markets are very forward looking,” he says. “While the economic environment might feel grim, investment returns won’t necessarily follow the same tune and it is possible they will stabilise throughout the year.”
Getting inflation under control is a key factor and there are many indicators to suggest this is happening. In the US, the Federal Reserve believes inflation could return to 3 per cent this year, while the OECD expects annual inflation to drop from over 8 per cent to 6.5 per cent across its member countries in 2023.
In New Zealand the latest Consumer Price Index (CPI) figures (for the September 2022 quarter) had inflation at 7.2 per cent, a slight drop from a 32-year high of 7.3 per cent recorded in the June 2022 quarter.
“Further falls in inflation is one of the firmer views we have for 2023. We won’t be getting another reading until late January which will relate to the December quarter, and it is possible it may have fallen further than that figure will show,” Bascand says.
“The job is not done and we may find it harder to get down than, for example, the US, but New Zealand is nevertheless on the way to getting it under control.”
Bascand says investors are well advised to be building portfolios now for where they want to be in five years.
“For the most part, investors develop either optimism or worry based on the bias of recent economic events,” he says. “But we want to reassure investors that many indicators point to the fact that there is light at the end of the tunnel; we wouldn’t suggest they pull back now by looking in the rear-view mirror of the pain experienced in 2022.”
However, he says investors in equity markets should be wary of stocks requiring a strong economic backdrop to perform, as growth may be challenged in 2023 with monetary policy tightening in many economies.
Bascand believes stronger bond returns than in recent years can be expected - in New Zealand the 10-year bond yield finished the December quarter at 4.4 per cent - while continuing global innovation and progress, particularly in technology, healthcare and the transition to green energy, are causes for optimism.
“We like the healthcare sector because it contains many defensive growth companies (those that are relatively stable or relatively immune to economic fluctuations) which can grow and sustain returns through a period of slower economic activity.
“Adoption of new technology will be a key to growth,” he says. “During the Covid period we saw fast adoption in this area but also changes to workplace practices and developments in healthcare. All of these resulted in better outcomes for people.”
He says the extent to which China re-opens will also have a bearing on the global economy. “There is evidence that Covid has peaked, allowing a quicker re-opening of the economy than analysts had earlier predicted.”
The reduced spending and money saved by many householders during China’s Covid restrictions, and an increased demand for travel as the country re-opens, could have a profound effect on the supply of goods throughout the world in the latter part of 2023.
Bascand believes the progress in developing renewable energy options is an area of opportunity for investors.
In Europe especially, huge investment in renewables is taking place, in part a response to the war in Ukraine where Russia has cut off much of the gas supplies to the continent in retaliation for the economic sanctions imposed by western nations.
Infrastructure investor Macquarie is investing in green energy projects in both the UK and Europe while the European Commission has said trillions of euros will be needed over the next 25 years to ramp up wind and solar power generation to break free of Russian gas.
“We can’t see that trend unwinding; indeed, the push towards renewables will only get stronger,” Bascand says.
“They are a core part of creating sustainable long-term growth for investors. Harbour is a strong proponent of investing in companies that deliver positive outcomes such as clean energy, medical advances and education solutions.”
This article is not intended as financial advice. The Product Disclosure Statement for Harbour Investment Funds, issued by Harbour Asset Management is available at www.harbourasset.co.nz
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