Inflation is still seen as the “big unknown” for investors in 2023, despite local and global equity markets, and in particular Chinese and Asian equities, being well positioned for the year ahead.
These are the views of GSFM and its fund manager partners Tribeca Investment Partners, Man GLG and Tanarra Credit Partners, who believe that the positive inflation picture emerging in the United States could provide a more positive environment for US financial assets.
However, inflation signals in Australia are less encouraging, according to GSFM investment strategist Stephen Miller, presenting potential headwinds to local equity and bond markets.
“The RBA and local interest rate markets continue to underestimate inflation momentum and the attendant policy rate implications,” he stated.
According to Mr Miller, high-frequency data continues to suggest significant domestic inflation momentum heading into 2023.
He noted that the unemployment rate remains at a near 50-year low, holding steady at 3.5 per cent as of December last year.
“Well-intentioned but potentially flawed changes to the regulatory environment, particularly in relation to the wage-setting framework, run the risk of entrenching higher inflation in Australia compared to elsewhere,” Mr Miller suggested.
“Against that background, the Reserve Bank of Australia (RBA) should be possessed of an acute inflation anxiety in its approach to policy settings through 2023. The inflation impact will be the wildcard for investors in the year ahead.”
Tanarra Credit Partners managing director Graham Lees said that a multitude of economic and market indicators are signalling that elevated levels of market volatility are likely to persist this year.
“Ongoing geopolitical events in the Ukraine add to the uncertainty with implications for energy and food prices, as well as global supply chains,” he said.
“Locally, we are yet to see the full impact of rising interest rates, and the flow-on effect this will have on household behaviours and consumer spending. It is also not clear how far interest rates will need to rise to curtail inflation, but we believe Australia is relatively well placed compared to other economies.”
Meanwhile, Tribeca Investment Partners’ lead portfolio manager, Jun Bei Liu, warned that a weaker period of economic and earnings growth is to be expected before a new upswing can begin.
“On a positive note, Australia is well positioned to ride out an economic slowdown, and while it will not be immune to rising rates and tighter liquidity conditions, it should avoid recession due to the benefit of a much weaker Australian dollar, ongoing strength in the labour market, supportive commodity prices (and volumes) as well as a temporary downturn in consumer spending,” she predicted.
Ms Liu also flagged the likelihood of meaningful cuts to earnings expectations in the future as the combination of rising costs and weaker demand begin to pressure margins.
“In the absence of a deep global or domestic economic slowdown, we think earnings downside should be modest with most corporates well positioned to navigate a short-term decline in demand,” she concluded.
