How will interest rate hikes play out in 2023?
The Australian economy would see reduced household spending and considerable decreases in corporate earnings during 2023, according to Touchstone.
In their 2023 outlook for Australian equity markets, Touchstone Asset Management revealed the expected economic impacts of higher interest rates on the new year.
The RBA had previously admitted to seeing an 8% inflation rate by the end of 2022, alongside seven consecutive interest rate rises to combat the rising cost of living.
The downsides
Ron Sargeant, portfolio specialist at Touchstone, commented that despite increased interest rates having a minimal impact on current Australian consumer spending, the next period of market adjustment would likely see significant effects.
“We expect the current resilience in consumer spending to last through Christmas and into early 2023, and our conversations with company management teams suggest strong price rises will continue during this period,” he said.
Sargeant forecast inflation to ease during the second quarter of 2023, but still remain relatively high.
He added: “This should see stronger-than-expected wage growth in 2023. It is no surprise that with many workers already seeing real wage cuts, the current level of industrial action is near 20-year highs.”
“Combined with high energy prices and prolonged impacts to supply chains, many companies will enter the second half of 2023 with elevated cost structures.”
Due to lowered household spending, the portfolio specialist noted that businesses would experience lower sales paralleled with higher cost bases. This would result in tightened margins and decreased earnings during H2 2023.
The upsides
“Overall, there is clearly a higher level of economic uncertainty than usual, and risks are skewed to the downside. Despite this, a number of companies are well-positioned to thrive despite the uncertain times.”
Sargeant identified firms such as Wesfarmers which presented resilient capital returns despite volatile economic conditions.
He additionally recognised the increased M&A activity as attractive investment opportunities.
Commodities were another favourable asset class to look out for in 2023. Touchstone expected a strengthening of commodities post-Chinese New Year as well as improving supply.
“For investors, the aim will be to identify the quality companies that can take advantage of these conditions to continue to generate strong cashflows and growth, while avoiding those that are vulnerable to cost and industry pressures,” Sargeant said.
AUTHOR
Jasmine Siljic
Recommended for you
Australian fund managers are actively seeking to launch Cayman versions of their funds to attract offshore flows, with Regal Partners set to launch its latest offering this month.
As private markets gain traction in Australia but only a limited pool of talent is available, three recruiters explore whether fund managers should consider looking overseas to find top talent.
With an explosion of private credit managers appearing in the market, two alternatives experts believe a consolidation is needed to maintain the quality of the sector.
Bentham Asset Management has become the latest fund manager to expand its distribution team as it reports increased interest in its credit strategies.
