Markets are pricing in further interest rate hikes over the course of 2023, building on aggressive monetary policy tightening in 2022.
The adjustments have sought to curb elevated inflation, which remains well above the traditional target range of 2 to 3 per cent in most developed economies.
According to Garth Rossler, chief investment officer at Maple-Brown Abbott, inflationary pressure and higher interest rates may persist, “surprising” investors waiting for stabilisation in market conditions.
This could, in turn, weigh heavily on corporate earnings, particularly as higher interest rates stunt economic growth.
“What happens to corporate earnings is perhaps the biggest uncertainty facing investors in 2023,” he said.
“Higher interest rates help to rein in inflation, but at least some of this will be achieved through reducing economic growth.”
Mr Rossler has flagged heightened risk among premium-rated growth and yield stocks, which he has claimed have not “fully adjusted” to a higher interest rate environment.
“There has been little in the way of consensus earnings downgrades for industrials in Australia, but we are starting to see some movement in the US,” he added.
“Of most interest is what is happening in the tech sector, which enjoyed an extraordinary uplift in earnings during [COVID-19], though those earnings have started to decline.”
However, Mr Rossler said he expects this environment to present investors with lucrative medium-term opportunities in the energy and broader resource sectors, despite short-term volatility off the back of the re-opening of the Chinese economy.
“Commodity prices remain elevated and we see potential for this to last longer than expected, with supply constrained by underinvestment and ongoing geopolitical turmoil,” he said.
The banking and financial sector, he added, may also benefit from this market transition.
Phillip Hudak, co-portfolio manager of Australian Small Companies, said investors may also benefit from opportunities in the small-cap market.
“For investors, this means a shift towards companies with predictable earnings or structural earnings growth that are less at risk of earnings downgrades in an economic slowdown,” Mr Hudak said.
“Australian small-cap market valuations are now looking reasonable relative to long-term averages.”
However, Mr Hudak urged investors to be “selective”, favouring “quality cyclicals” as COVID-19 beneficiaries “fully unwind” and cyclical earnings expectations are “re-based with potential oversold share prices.”
According to Mr Hudak, Australia’s corporate earnings are better placed than other markets around the world, given the Reserve Bank of Australia was slower to adopt a monetary policy tightening strategy.
“Corporate balance sheets in the Australian small-cap market are in good shape at this point in the cycle,” he said.
“In addition, the domestic consumer is in a better position relative to global peers given the still elevated savings rate.”
