2023 Market Outlook

2022 was a particularly tough year for investors. Pent-up demand pushed inflation to multi-decade highs in an environment where COVID-19 related supply disruptions meant that goods and services were harder to come by. The war in Ukraine also contributed, with global energy and food prices sharply higher.

Against this backdrop, the world’s central banks raised interest rates in an attempt to ease demand and slow their economies – but they did so at an extraordinary pace. This put pressure on both households and businesses alike.

Global equity markets fell sharply, down 17.5%— over the year. For fixed interest markets, they had one of their worst years on record, as bonds have a tendency to underperform when interest rates are rising. They fell 11.7%—.

As we look ahead to 2023, uncertainty remains high. But while challenges remain, there are many things to be optimistic about. Here are some of the key themes we expect this year.

Inflation, and how central banks navigate it, will continue to be key in our assessment of the outlook for financial markets and the broader economy in 2023. While it remained stubbornly high last year, there are signs it may have peaked.

While we believe rates of inflation in most of the major economies will slow, we’re not expecting a major shift in central bank rhetoric, given that current inflation is still well above target levels (with most central banks targeting a 2% level, or thereabouts). Our view is that central banks will err on the side of caution and not take their foot off the brakes too early and risk creating an environment where inflation becomes more entrenched.

In 2022, as central banks raised interest rates, we saw evidence that the pace of economic growth was slowing. This year, we expect the cumulative effects of these rate hikes – which flow through to activity with a delay – to continue to weigh on the pace of growth, and could tip some of the world’s economies into recession.

That being said, in the US (which tends to dictate what’s going on in global financial markets), we don’t expect a recession to be deep, or long-lasting. That’s because, during the pandemic, there was an accumulation of household wealth; asset prices rose (following initial falls), wages increased, the social safety net improved, and stay-at-home measures saw spending slow and savings increase.

New Zealand’s economy proved resilient in 2022, evidenced by stronger-than-expected growth. This was largely due to interest rates being held close to record lows and an extraordinary amount of government spending both during and following the pandemic. However, it was not immune to the high levels of inflation seen elsewhere, and the Reserve Bank of New Zealand has recently made it clear that it intends to engineer a recession to help cool the economy.

In light of this, our economy will face some challenges in 2023. Further declines in house prices are expected, according to the Reserve Bank, while sentiment surveys suggest economic activity will slow. It’s not all negative though, the recovery of tourism is expected to help boost certain sectors of the economy.

Finally, the general election will likely add further uncertainty to New Zealand’s financial markets later in the year. And with both major parties looking even in the polling at the moment, the minor parties may, once again, play a role in deciding who will be in power.

While many of the challenges from 2022 will continue into this year, there are reasons for investors to be optimistic.

To begin with, following a year of declines, equity market valuations have fallen back to more attractive levels. It means that, as an active manager, there are opportunities for us to invest in quality companies at attractive prices. Meanwhile, in fixed interest markets and with the majority of interest rate hikes behind us, bonds now offer a more attractive outlook than they have for many years.

From an investment standpoint, 2023 may once again test investors’ nerves, but we would remind you to stay focused on your long-term goals. Market falls, such as those we saw last year, are part and parcel of investing. Nevertheless, whatever the year brings, we believe our approach to investing – with an emphasis on diversification and investing in high quality and highly liquid investments – will help smooth out any bumps along the way and allow us to capitalise on any opportunities.

Finally, we continue to place importance on our approach to responsible investing. One of the most significant developments recently was the launch of the Stewardship Code Aotearoa New Zealand. ANZ Investments is proud to support the code, and is one of the founding signatories. The good news is there’s strong alignment with our existing practices and approaches. Last year, we also published our inaugural stewardship updates, and took steps to provide even greater transparency on how we’ve engaged with companies.