There’s no doubt that 2022 has been a roller-coaster year for investors in all stock markets. But whether the worst is behind us or whether we’re just getting started is still unclear.
As good investors, all we can do is to build a strategy that is ready for any outcome. But looking at a few of the key variables ahead can be an enormous step towards making the most of a lucrative 2023, or surviving the worst outcome.
I’ve identified three key variables that I think will make or break 2023 for investors. Let’s dive in…
1) Inflation
Without a doubt, the single biggest contributor to a positive few months ahead is how central banks around the world deal with inflation.
It’s not going to be easy, since interest rates are really the only tool that banks have to indirectly bring down prices. But if we see inflation trending down towards 2%, we’re going to be in much better shape than if the double-digit inflation we saw in October’s UK CPI (Consumer Prices Index) lingers.
I predict we’ll see a peak in inflation at the start of 2023 in the UK, with rates being kept higher for longer to prevent a second peak.
2) Recession fears
In an interview with CNBC, Dana Peterson — Chief Economist at the Conference Board — explained that 98% of CEOs surveyed are expecting a recession in the US. And with further inflationary pressures from rising energy costs, the UK is likely to be even more pessimistic.
So it’s looking very likely that we will see some level of retreat in growth in 2023, but the extent of this — and length of time it lasts — is open to debate. Based on history, we usually see recessions of about 10 months. But with negative rhetoric from the Bank of England, we could well see a 15-month long drawdown.
As we’ve seen in history, though, not all sectors are impacted in the same way during recessions. Buying into companies with strong pricing power, with products we all need (rather than want) are always good places for my money to be working during a recession.
For young investors, recessions can be some of the most lucrative periods to be putting their money to work. If investors can build a portfolio of quality companies at great prices, then a mild recession for a year or so is nothing to worry about.
I predict most economies to experience mild recessions in 2023, with the least severe in the US, and more pronounced declines in growth in the UK and Europe.
3) Geopolitics
The war in Ukraine has obviously had a huge impact on the world, both culturally and economically.
Energy markets soared, leading to some of the high inflation I spoke about previously. But with WTI (West Texas Intermediate) crude oil prices now recovering to January levels, the leading catalyst is the geopolitical impact of a continued war in Europe.
Increased defence spending, supply chain distortions, and tightening monetary policy to manage slower global growth is all part of the outlook if we don’t see an end to the conflict. But if progress is made towards a peaceful resolution or ceasefire, then I’d expect everything except the defence sector to rally.
I wouldn’t want to wrongfully speculate on the outcome, but having a portfolio that hedges the volatility of energy prices has been essential in 2022.
I predict commodity prices to remain high, with continued increases in global defence and cybersecurity spending regardless of events in 2023.
Overall
Clearly 2023 is going to be a challenging year, with a lot of the steps taken during the pandemic now hitting economies around the world in the form of inflation, with geopolitics and uncertainty making things even more difficult to predict.
But as I said, the time to be putting my money to work in the stock market is during periods of fear and uncertainty. Because I can handle the volatility, and trust the process, I might just look back in 10 years and think this was the moment my personal finances changed forever.
