Paul Taylor, head of investments Australia at Fidelity International, said that inflation and interest rates would stay at the forefront in 2023.
“In the US, the Federal Reserve’s aggressive interest rate rises are strengthening the US dollar, which is having ripple effects worldwide. China’s Zero-COVID Policy is constraining growth. Meanwhile, the conflict in Ukraine continues to have wider global implications,” he said.
“With interest rates expected to keep rising, the likelihood that the US and Europe will enter a recession in early 2023 is increasing. Still, it is less certain whether Australia will follow suit, given high energy costs and favourable conditions for commodities, although future rate rises could do some damage.
“Immigration and population growth are likely to accelerate in 2023. These are key to underpinning Australia’s long-term structural growth and providing an additional cushion against recession.”
Mr Taylor said that there are still reasons for optimism, particularly if China starts to open up and interest rates stay lower than predicted, adding that “although inflation is higher than usual, that can work in favour of equity markets if it remains reasonable”.
According to Mr Taylor, with Australia leaning heavily on commodities, the country can still perform well through this period of high inflation.
“The businesses that tend to do well during inflationary periods are those linked to commodities (both soft and hard), as well as essential businesses that have pricing power,” he said.
“The opposite is true for companies with no pricing power or offering fixed-price contracts. Businesses such as contractors and building companies with fixed-price contracts and rising input costs see their margins significantly squeezed through inflationary periods.
“While sectors such as essentials (supermarkets, healthcare), materials, insurance and financials are likely to perform well in 2023, a more challenging environment should provide investors with an opportunity to invest in inexpensive, high-quality businesses with long-term structural growth.”
Looking toward sustainability, Mr Taylor said it is an “essential component” of Fidelity’s analysis.
“It can add meaningful value over the long term. ESG factors are central to the strategy’s research and investment process. In line with Fidelity’s policies, ESG factors mean we avoid certain stocks,” he said.
