Investment markets in 2023 will be shaped by interest rate rises, heightened inflation brought about by global food shortages and soaring energy prices as well as the re-opening of China.

“I do think it’s going to be another year of volatility, particularly as the market is in a bit of a tug of war around what does potential peaking in inflation mean versus slowing growth,” Penny Heard, head of Australian equities at UniSuper said.

“Inflation is still very much front of mind and today we’re looking at a cap on energy, and more energy instability on the back of Ukraine war but also, food prices and shortages around food given the recent weather incidents in Australia.”

Global economies have yet to experience the full effect of the rate hikes Sonya Sawtell-Rickson, chief investment officer of HESTA said. “It has been one of the most aggressive interest rate hiking cycles in decades. The impact of that on the real economy is yet to really flow through. We know the lags in monetary policy changes can be six to 12 months so they are likely to hit next year,” she said.

“That’s going to have an impact on demand and the probability of recession is obviously heightened and depending on the severity or duration of the potential recession, we could see more volatility ahead.”

However, Sam Sicilia, chief investment officer of the $94 billion hospitality industry super fund Hostplus was more sanguine that global markets would be less volatile in 2023 with the end of the pandemic restrictions and COVID supply chains disruptions improving.

While no one could be sure of the exact timing of these events he said improving sentiment and easing pressures could see a further upturn in world equity markets this year.

“We don’t know when, but we know the pandemic will end and its consequences for supply chains and the era where everyone has been locked up will also come to an end.”

He said any sign that the war in the Ukraine would come to an end would also be a positive boost for markets. “As a long-term investor, you use your cash flow to take advantage of opportunities.”

It’s all about rates

Allison Hill, chief investment officer, responsible for managing the state investments team of Queensland Investment Corporation is expecting central banks in the US and Australia to continue to increase rates early in 2023.

“Central banks will keep going until they see that slowdown in wages growth and retail spending – the signs that are really going to allow them to take their foot off the accelerator.”

“It is hard to do well, so it’s possible that they could apply a stronger set of brakes that may actually be needed, because data is imperfect.”

However, Hostplus’ Sicilia expected to see interest rates fall in 2023 as inflationary pressures eased.

“Interest rates in 2023 will start going south,” he said. “They may well start going south very quickly. In the US, any little bit of good news can see the markets move.”

Investment themes

The re-opening of China is an investment theme that will resonate in 2023, notwithstanding the lack of a clear exit plan after the government abruptly abandoned its strict zero-Covid policy in the face of protests.

“From an economic perspective, having China come back into the market in terms of the contribution it has to a global economy that should be a net positive,” Norman Zhang, chief investment officer of Legalsuper said.

“It’s already happening but it looks like it’s not planned particularly well but in the longer term, this is probably something that China needs to do.”

UniSuper is looking to position its $115 billion portfolio to leverage re-opening of the world’s second largest economy by investing in commodities such as battery materials said Heard.

“We’re very focused on the pathway for reopening China and that’s going to be very important factor for 2023,” she said. “But let me be honest, obviously no one really knows the pathway there.”

The growing momentum in the decarbonisation of global energy systems will also feature highly in investment strategies. “We think the other big thematic is the climate transition. We’re going to see a significant amount of capex required to facilitate the transition necessary for a one-and-a half degree pathway,” said HESTA’s Sawtell-Rickson.

HESTA recently announced a up to $100 million commitment to green hydrogen projects sponsored by ReNu Energy.

Inflation-hedging assets such as infrastructure and private debt will continue to find favour with investors. “We are attracted to assets with inflation hedging characteristics as we do think inflation is likely to remain elevated over the medium term,” she said.

While many asset owners are underweight equities, there is also upside risk when equities markets recover said Legalsuper’s Zhang.

“In an environment where despite the sell off, there is a pretty good potential for rebound if things happen. If inflation is lower, central bank pivots come through, China rejoins the economy, all these are upside risks you have to be really careful about,” he said.

“The Fed hasn’t been able to successfully deliver a soft landing in its history, but you don’t want to discount that possibility, because if it does, then equities can run pretty hard.”

This article was edited on 4 January 2023 to correct Penny Heard’s title from head of global equities & quant strategies to head of Australian equities at UniSuper.

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