Vision 2023 – brief outlook on the year ahead for investors
This report reviews the accuracy of last year's global economic predictions and outlines the outlook for 2023. The 2022 predictions on interest rates, emerging market defaults, digital assets, and stock market performance were largely accurate. Exiting stock portfolios based on these insights proved beneficial.
Our House Views: Global Economic Outlook
At the beginning of last year, we made a few predictions about the global economy which we shared with our clients and the wider investor community in two distinct circulars – the first on the 4th of January 2022 and the second on the 24th of January 2022. To keep ourselves honest, we have reproduced the salient points of last year’s outlook – verbatim – and reflected on their veracity in light of the events that actually unfolded.
“Base rates will continue to rise as a measure to counteract the real threat of inflation. This will make borrowing more expensive across the board – for governments, companies, and individuals such as mortgage seekers. We foresee a cyclical shift from growth assets such as stocks into cashflow and income assets such as treasuries partly as a result of this.”
This projection was largely accurate. Growth assets witnessed an exodus of investors in favour of idle cash, oddly, albeit this had to be done with an acceptance of a real money loss when adjusted for unprecedented high levels of global inflation.
“We anticipate the threat – or perceived threat – of emerging market countries defaulting on their debt intensifying. This is due to the growing concern among global analysts and investors of unsustainable debt and interest burdens, particularly to other sovereign lenders such as China. Over the next 12 to 24 months, our predictions point to more defaults adding to what was witnessed in 2020 and 2021 where six countries (Argentina, Belize, Ecuador, Lebanon, Suriname, and Zambia) all defaulted on their sovereign debt obligations. Public debt in emerging markets (excluding China) was expected to reach 61% of GDP by the end of 2021.”
This was bang on the money – excuse the pun (or not). The World Bank reported a 35% increase on government debt servicing payments by low- and middle-income countries from 2021, with no hope for respite in 2023 and 2024. This is due to high interest rates, a large number of bonds maturing, and because countries have had to start making up for debt service that was deferred during the pandemic. This is worsened by the fact that the US dollar has surged in value, making it even more expensive to settle foreign debts. For instance, Ghana, with one of the world’s worst performing currencies in 2022, is facing a major economic and financial crisis. Consequently, the ratings agency S&P has lowered its sovereign rating to ‘selective default’ off the back of a recent announcement to suspend all external debt payments until further notice.
“Despite the polarizing debate about the bankability of digital assets such as crypto, non-fungible tokens, and the metaverse, there is little debate that their rise and relevance will persist and perhaps become more pronounced this year. Wall Street Institutions such as J.P. Morgan that initially dug their heels into the sand on crypto have buckled under pressure from clients who have long demanded that their bank provide access to the digital universe. As the digital universe expands, so will the players and actors in this space. We believe that investors will ignore digital assets at their own peril but should proceed with caution as the market is fraught with “wannabe” projects that don’t stand a chance.”
The jury’s still out on this one. The meteoric rise and cataclysmic fall of the crypto exchange FTX, all in the same year, sums it up perfectly – even if poetically.
“The past year (2021) has been choppy for stocks and shares with a lot of sideways movement. Whilst we remain bullish on the long-term performance of our stock selections due to their intrinsic superiority over other stocks in their respective peer groups, we believe that the headwinds facing the stock market this year are far too great to see any meaningful returns in our portfolios. Though we enjoyed stellar returns in 2020, alas “the market giveth and the market taketh away” in 2021, and we anticipate a particularly unremarkable year for stocks due to inflation and interest rate pressures globally in 2022. Investing in the stock market is a long-term game. We believe that in the not-too-distant future, our portfolios will make impressive returns relative to market benchmarks. However, in the short term you are guaranteed to see some downward pressure in your portfolio as the entire market suffers a correction this year, which statistically speaking has been long overdue.”
This prediction couldn’t be any more accurate. It has been a year of agony for stocks. The three major US indices suffered their worst year since the global financial crisis of 2008. The Dow fared the best of the bunch in 2022, down about 9%. The S&P 500 dropped 19%, and the tech-heavy Nasdaq tumbled 33%. Off the back of our outlook and strong advice, most of our clients elected to exit their (publicly traded) stock portfolios at the start of the year and those who did escaped the bedlam.
How our strategy held up in 2022
Our global outlook for 2023
The outlook for 2023 by most analysts makes for sobering reading. The headwinds that battered the markets last year still persist and the extent of the damage is yet to be fully assessed and understood. But one thing that history has taught us is that there’s always opportunity in every crisis – for the discerning investor. With a high degree of conviction, we share our house views for the coming year.
Interest Rates
Interest rates are probably the single most important contributor to how the global economy behaves. We don’t see the US Federal Reserve being as aggressive with interest rate hikes this year, nor do we see an outright reversal of their dovish stance. The Fed is likely to stay put and observe the impact of their rate hikes on the economy and inflation in particular, before deciding which direction to head down. This means that interest rates will remain elevated for most of the year, which has consequences for economic activity and asset prices. The combined effect of high interest rates, a cost-of-living squeeze, and higher taxes in many parts of the world – amongst other factors – will lead to downward pressure on real incomes and asset values. This will force a correction in house prices in many large, mortgage-reliant economies such as the United States and the United Kingdom, which have both enjoyed an unabated property boom over the past decade. This dynamic presents an opportunity for highly liquid investors with a sufficient dry powder to pick up real estate assets at a discount as it steadily moves from a seller’s market to a buyer’s market. The writing’s already on the wall – for instance, an increasing number of property transactions in the United Kingdom have sold below asking in recent months. It is also expected that the US dollar will continue to pick up strength against most G10 and emerging market currencies this year.
What this means for you
How these macro themes will impact you depends on which part of the world you live in and how exposed you are to certain currencies, asset classes, and industries. That said, we believe the global stock market will continue its lacklustre trend, albeit with far less carnage than we saw in 2022. On the other hand, 2023 looks to be the year that fixed income instruments will make a comeback following a brutal drop in publicly traded bond prices in 2022. Though it may be a bumpy ride for public markets due to cross currents, both public and private fixed income will offer attractive yields at lower risk than we’ve seen for several decades. Above all else, we recommend a diversified portfolio across several asset classes, but our favourites this year are real estate, fixed income, and recession-hedge assets including gold.
