Before we can move on to 2023, we need to make every effort to put 2022 in the past. Unfortuitously, like a hangover from a New Year’s Eve drinking binge – the kind that ends in tears – we will wake up in 2023 laden with all of the financial headaches we couldn’t get over.
Concerns about rising prices, hikes in interest rates the conflict in Ukraine, China’s economic lockdown to battle Covid, distribution network gridlocks, and questions around capital valuations, as well as, the crime, load-shedding, bad roads, and dry taps at home, as well as a ruling party that is in disarray, has us all waking up with headaches most mornings.
The global stock and salary markets attempted one last time in October to recover from the losses they had sustained for the majority of the year, but they were unsuccessful. Since the markets in South Africa take their signals from what is occurring globally, here are some themes that will be important to keep an eye on in 2023:
Sluggish Economies Will Hurt Earnings
The prognosis for the world economy is becoming increasingly gloomy with each passing day, diminishing the prospects for businesses to increase their earnings as well as for customers who are currently battling to cope with the increasing prices of a wide variety of goods and services, including food and fuel.
After predicting in October that 2023 will feel like an economic downturn, the International Monetary Fund issued a warning a month later that economic data is weakening, leading to further upcoming challenges. Earnings projections from analysts are beginning to reflect this trend.
According to a survey conducted by Bloomberg, which polled 17 different companies, the majority of Wall Street strategists believe that the S&P 500 Index will experience a decline in the coming year for the first time at least since 1999. The predictions of the analysts were all over the place, varying from a 10% increase to a 17% decrease. This represents the widest range of results seen since 2009.
The market downturn in stocks is expected to get worse before it gets better, according to a warning issued by Goldman Sachs, which predicts that it will get worse in 2023. According to Morgan Stanley’s analysis, US stocks are headed for a turbulent future because share prices are excessively high and profits from American companies are expected to decrease. The opinion of the American bank is that the second half of the year may hold some promise for the market.
This makes it more difficult for investors to distinguish between winners and losers in the market, and it also makes it more difficult to find profitable investment opportunities. Because the era of easy money has come to an end, investors no longer have the option of putting their money into a marketplace fund or an index and expecting it to grow in value. It requires active management, and in today’s market, holding only stocks or bonds is not sufficient to achieve the desired results.
When you take into consideration the fact that stocks on the S&P are buying and selling at only 20% of all-time high levels, market values are at multiples of where they were just a couple of years ago (when bear markets were pushing hard), inflation remains unclear, no one knows when the Fed is going to cease, economies are decelerating, and customers are struggling, then it seems only appropriate to say that there is an accident waiting to occur.
Producing Returns From Non-traditional Assets by Using Alternative Investments
Hedge funds are among the most successful types of investments when market uncertainty and volatility are present. These alternative financing methods no longer have the same negative connotation as being managed by shady characters who make risky bets, charge exorbitant fees, and fail to perform as well as was initially promised. This is not the case at all.
When it came to the legislation of hedge fund product lines, South Africa made history when it became the first nation to do so in April 2015. The fees are open to discussion and, in many instances, are determined by the level of performance.
The management teams of hedge funds have greater leeway to take either short or long stances in securities (bets that the value of assets will either decrease or increase) or market-neutral finances. The goal of macro hedge funds is to generate profits from significant price movements in indexes brought on by significant political or financial events.
In the 6 months leading up to June, the South African hedge fund industry saw a surge in assets under management of 20%, bringing the total to R104.54 billion. A report that was published in Institutional Investor found that hedge funds had better performance than the market during the first half of 2022. According to the report, an index that was collected by Hedge Fund Research showed that the index fell by only 5.9%, while the S&P fell by 20%.
Accept That Inflation is Here to Stay
When will inflation reach its next destination? When exactly are monetary policymakers going to acknowledge that they’ve reached their limit and withdraw their support for further rate hikes? When they predicted that the current period of inflation would be short-lived a year ago, both the Federal Reserve and the European Central Bank were wrong.
The strong centralized banks in the world are currently mired in assertive rate-hiking cycles, the repercussions of which are being felt all over the world, including in South Africa, in which the Reserve Bank has preceded the magnitude of the rate increases in the United States.
There is no way to predict when inflation will reach its highest point; earlier this year, it reached levels that hadn’t been seen in the United States and the United Kingdom in over four decades, and it increased by double digits in the euro area. According to projections made by Morgan Stanley, the rate of global inflation will peak in the fourth quarter of the following year. The Federal Reserve may move its primary target range for interest rates up to 4.5%-4.75% by January, up from 3.75%-4%, and then maintain that level until 2023.
J.P. Morgan Asset Management anticipates that prices will increase in the United States at a slower rate, even though uncertainty in commodities and other distribution network risks may put pressure on the Federal Reserve to take action. It projects that rates will be at 5% in 2023, with the possibility of an increase.
A closer look at the inflation figures uncovers that price increases across the board in the United States are widespread. Christine Lagarde, the President of the European Central Bank, has issued a warning that inflation there has not yet reached its peak. This is primarily because high energy prices must still feed into the economy as a whole.
Our nation’s central bank, which increased interest rates to their highest level in five years in October, has not shown any signs of easing, and it projects that inflation will only slow to approximately 4.5 percent in 2024. Once more, this means investing more strategically and making use of financial instruments to achieve returns that are higher than inflation even when market prices are either remaining stable or falling.
There is No Way to Get Away From Energy in Sustainable Investing
Even though sustainable investing is drawing criticism, the practice is not going away anytime soon. It is just too overwhelming of a necessity to reinvest capital to endorse a better future, keep our leaders on their toes, and protect our planet at the same time.
The practice of environmental, social, and governance investing has come under fire for a variety of reasons, including product misidentification and discrepancy among credit agencies, individual scoring companies, and investment managers who evaluate investments. Because the vast majority of investors require them, including these considerations in the screening procedure is mandatory. You need to be on the lookout for potential investment targets that are “greenwashing” their environmental, social, and governance (ESG) processes by having the appropriate procedures in place.
The movement toward the use of renewable energy sources is one overarching topic that will predominate in this area. According to estimates provided by McKinsey & Co., the amount of electricity that can be generated from renewable sources around the world will increase by more than 80 percent from its level in 2020 by the year 2026.
The Russian invasion of Ukraine brought into sharper focus Europe’s reliance on Moscow to supply its energy requirements. We are familiar with the difficulties of load shedding in South Africa; we can only hope that somebody will switch the lights back on.