Will There Be a Rebound in 2023?

2022 was a year of few winners and many losers. Business trends, social change, and technological progress can often determine which companies come out on top, but last year it was all about the economy and geopolitics. The biggest winner, unsurprisingly, was the energy sector.

Many will be wondering if 2023 will have the same winners and losers, in part because the economy and geopolitics will remain similarly bleak. Below, we take a look at what we know so far and what the consensus is among analysts.

Will interest rates and inflation remain high?

As covered in our recent post [internal link to inflation article], history indicates that inflation will remain above the 2% target rate for many years, despite the Bank of England claiming otherwise.

The consensus is certainly that inflation will fall, it’s more a matter of what degree. One reason why the Bank of England may be publicly optimistic about inflation falling is that they do not want the pressure of further increasing interest rates to combat it. They were reluctant and slow previously when increasing them, and it could push the UK into a recession.

Nevertheless, the market is predicting that interest rates will rise to 4.75% before reducing in 2024. This will not totally combat inflation, as it does little to tackle energy prices, but it may slow down the economy enough to cool prices elsewhere.

Most likely house prices will be one of these sectors to feel the brunt. Charlie Nunn, CEO of Lloyds Bank, spoke to CNBC recently. “The other challenge a lot of our customers are focused on is house prices and we do see house prices softening about 8-10% this year.”

Will the UK see growth or recession?

The UK is set to face one of the worst recoveries in the G7, to which “somewhat agree” was the consensus answer in an FT survey of economists for the following statements:

• Inflation will remain above target longer in the UK than in peer countries
• The Bank of England will not cut rates in 2023

And, to the statement “UK economic growth will be stronger than peer countries”, a staggering ~80% chose either strongly disagree or somewhat disagree.

However, this is compared to peers. In absolute terms, analysts either claim the UK will slightly dip into recession, or slightly avoid it. In some sense, it doesn’t matter which side the needle falls on a technical level, as the consumer and investor experience will be similar either way. Stagnation appears to be the consensus.

Will supply chain issues continue?

Since the pandemic, there have been supply chain issues all the way from semiconductors to lorry drivers. KPMG expects supply chain disruptions to continue in 2023. The reasons behind this are either new or existing geopolitics issues, inflation and recession, along with climate change events. 2022 set all kinds of records for heatwaves, droughts, fires, and floods, and this is expected to continue.

According to the Hubs supply chain resilience report 2023 survey, the top supply chain risk of 2023 is the semiconductor shortage. Port congestion, inflation causing demand uncertainty, COVID in China, and new carbon emission regulations are all other risks anticipated.

Will the energy crisis continue?

Unfortunately, it doesn’t seem like the energy crisis is coming to an end soon either. Back in 2022, British Gas CEO Chris O’Shea predicted energy prices to remain high until 2024. Within four days of each other, the FT’s Chris Giles claims the end of the crisis is in sight, whilst a TIME article is preparing us to expect a worse winter in 2023.

Most analysts agree that renewables are the way forward, though the transition towards them and away from gas dependence is a slow one. Another thing that analysts agree on is that there’s no real end in sight regarding the invasion of Ukraine. Being the biggest perpetrator of the energy crisis, it’s clear that energy prices will remain higher than pre-invasion levels.

Should investors be optimistic?

With seemingly bad news across the board for 2022, why is it that many analysts are optimistic about investing in 2023?

Well, the first thing to clear up is that markets are not the economy. So, just because the economy is going to suffer, it doesn’t mean that markets necessarily will - we saw this during the height of the pandemic. Furthermore, even if they do, there will still be winners and losers as seen in 2022. In fact, the FTSE 100 is set for a record high and is up 3.20% from this time last year (17th January 2021-2022).

The same can’t be said for the S&P 500, which suffered more than an 18% loss in 2022. One reason for this is that there are more tech stocks like Tesla, which at one point dropped 69% because their high-risk nature fell out of favour.

Clearly, whether investors should be optimistic may depend on what they hold and what their strategy is. Tech and crypto enthusiasts may feel like they can turn things around, but volatility and uncertainty are very high with these assets heading into 2023.

Furthermore, news is relative. The way markets respond to news is often regarding context and expectations. Therefore, a scenario in which inflation is at 6% may sound bad, but in the context of it dropping from 10%, this sounds positive. On top of this, if the markets expected 8%, then markets may respond positively to this ‘great’ news of 6%.

If we consider that markets endured 2022 without too much loss (particularly the UK), things may be on the up. Valuations are currently low/corrected, and those using dollar cost averaging may not be phased right now.

Final word

Whilst the economic outlook is looking poor for the UK (particularly compared to its peers), we may see improvements in 2023 regarding inflation and possibly energy. Given that the economy and markets often have a strange relationship, it’s difficult to forecast global returns. But, properties, tech stocks, and many other industries have seen price corrections that may light up the eyes of value investors. Conversely, commodity and private credit investors may feel confident about their inflation hedge.

For bespoke guidance on your investments heading into 2023, get in touch with a Moneytree Wealth Management advisor. Moneytree Wealth Management provides expert advice and guidance on growing wealth through diversified investments and tax minimisation.

Approver Quilter Financial Services Limited & Quilter Mortgage Planning Limited. 01/03/2023