If the past three years are anything to go by, another 12 months of uncertainty are likely on the horizon as the effects of inflation, interest rates, the movements of central banks and a range of other issues continue to dominate.
To try and clear up some of this uncertainty and get a gauge on what to expect for the Australian share market in the year ahead, we asked David Bassanese, chief economist at BetaShares, to share his views:
In your opinion, what does the Australian sharemarket look like in 2023?
The Australian sharemarket should remain challenged at least over the first half of the year, due to both slowing local economic growth and a likely recession in the United States. Earnings expectations are expected to be revised down, especially among consumer-facing sectors and resource companies.
I suspect China’s hopes for an economic bounceback won’t be as strong as markets hope and won’t offset the downturn in the global economy caused by a weaker US economy. That said, my base case is that the Australian market won’t need to decline as much as the US market over the next six months, given valuations are less rich and our economy and earnings could hold up relatively better.
What’s more, the market could rebound in the second half of the year as slowing inflation and better-balanced labour markets allow central banks to cut interest rates and encourage a re-acceleration in economic growth.
What sectors and companies will do well in the next 12 months and why?
Interest-rate sensitive and defensive sectors are likely to do best over the next year, due to a likely peak in long-term bond yields and weaker economic growth. Favoured areas would be infrastructure and listed property. Healthcare, due to its defensive qualities, also remains attractive. By the second half of the year, however, there is likely to be a renewed interest in growth sectors such as technology and even consumer discretionary stocks.
Outside of equity markets, given that economic growth should be slowing and that central bank policy tightening is likely already well priced into the market, investors might avail themselves of the opportunity to lock in attractive interest rates in the usually more defensive bond market. After a horror 2022, bonds may also provide capital gains as yields potentially fall over the course of the year.
What are the main volatility risks on the horizon?
The main risk for markets is a US recession, brought about by aggressive Fed tightening to loosen the labour market and bring down wage and price inflation. This risk, although widely discussed, is not priced into the equity market given still positive US earnings expectations for 2023 and an above-average PE ratio of almost 18.
On the upside, a faster-than-expected fall in US inflation and/or a Russian withdrawal from Ukraine would be positive factors for markets. China’s re-opening has mixed implications, as a strong rebound might be good for commodity markets and hence the relative performance of the Australian equity market, though it might add to upward pressure on global inflation and interest rates, which would be negative for equity markets overall.
What are the biggest opportunities for companies in the next 12 months?
A gradual softening in the labour market should allow companies — that are left able to — the opportunity to hire good staff that they’ve been trying to hire. An easing in global cost pressure might also enable them to restore profit margins and/or reward customers with a welcome reduction in prices.
