What is the market outlook for 2023?
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The past two years have witnessed the arrival of COVID-19, the Russian invasion of Ukraine, surging inflation (to levels not seen in 40 years), public sector strikes and three prime ministers. To say it has been an uncertain time seems feeble, and analysts are still unravelling the full impact on markets as investors grapple with their portfolios. Unclear, also, is the outlook for the year 2023. Should we expect a recession in the UK? If so, how can investors prepare? Is it possible that forecasters have been overly-negative in their assessments of the economy?
In this article, our Grantham financial planners offer some reflections on these important questions and how investors might wish to prepare. We hope you find this content useful. If you want to discuss your financial plan, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
A possible recession (but a strange one)
It is no secret that pundits widely expect the UK to enter a recession soon (if it has not done so already). The Bank of England predicts the longest recession since the 1930s, when the Great Depression struck the world. This might sound alarming, yet if the UK is entering a recession it appears to be a highly unusual one.
UK unemployment, for instance, is falling (rather than rising, which one might traditionally expect in a recession). There are some signs that house prices are starting to fall in certain parts of the country, yet these – along with foreclosures – are not collapsing at the levels expected during (or prior to) a recession; although, admittedly, this picture might change.
Interest rates have certainly risen in 2022 (putting more pressure on mortgage holders) and UK households are further squeezed by the cost of living crisis – manifested primarily in higher food and energy prices. However, credit markets are still not yet currently predicting that these forces will inevitably result in catastrophe. During the COVID-19 pandemic, banks widely increased their provisioning for “bad debt” (e.g. money owed to banks which was likely to not be repaid by borrowers), yet the government’s support measures – such as furlough – meant that many of these “war chests” were unnecessary. Similar provisioning has only started again in 2022 at a moderate pace. At present, banks do not appear alarmed by household and corporate distress.
A new era of interest rates and inflation
The Bank of England predicts that UK inflation will not return to its 2% target for at least a few years. It might start to fall from the middle of 2023, partly due to government policy (e.g. the “cap” on energy prices) and because demand for goods and services in the UK is expected to go down. Furthermore, the upward shock from Russia’s invasion of Ukraine earlier in 2022 is likely to fall out of calculation by April 2023 (barring any further escalations). Interest rates, moreover, could approach 5% next year and may not return to their near-1% levels for a long time. Overall, this means that UK households are likely to have less disposable income in 2023, with some forecasts predicting the biggest fall in living standards in six decades. For many investors, this could mean less capital available to invest and also their investments must work harder to produce inflation-beating returns.
Implications for markets and investors
The UK economy could struggle in 2023, with some analysts predicting that it could shrink by 1.4%, partly due to slower global growth. Generally, rising GDP (gross domestic product) acts as a strong platform for stock markets to build on. After all, the more consumers spend money on companies’ products, the more profits they stand to generate (which can then be passed on to investors as dividends and/or higher share prices). The fact that the UK economy may shrink or flatline in 2023, therefore, could act as a downward force on equity markets.
Given the uncertainty in the economy and markets at the end of 2022, it may be worth reviewing your investment strategy with your financial planner to make sure you are happy with it. Whilst short-term market volatility is not, in itself, usually a justification for changing your approach, the shifting UK economic landscape (e.g. higher interest rates) may be key factors to consider for your portfolio. Remember, economic change can also bring new opportunities as well as risks to investors who are prepared to look for them.
A key aspect of your portfolio to check is its diversification, particularly regarding its exposure to global markets. Concentrating all of your investments within the UK risks leaving your portfolio overly exposed to market swings unique to the UK. By “spreading out” your investments across multiple regions, however, you can potentially access investments that are less available in the UK (e.g. fast-growing tech companies) and give yourself a better chance of accessing a stable set of returns over time. An appropriately-diversified portfolio may outperform a “concentrated” one over time with the right strategy, and the volatility can be easier for investors to stomach.
Invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
