By Cameron Cooper

Coming off the back of one of the most trying years for investment returns in decades, investors are rightly asking if 2023 is likely to be much better. The truth is that the jury is out, with high inflation, rising interest rates and geopolitical pressures creating ongoing market volatility. For Australian investors wondering which asset classes to embrace or reject, North Advisory director and wealth advisor Cayle Petritsch CA has a blunt message – it is probably too late. “Those decisions should have been made three or four years ago,” he says. “The market has already moved.”

Not that Petritsch thinks advisors are powerless to assist their clients in tough times. Rather, he is an advocate of the mantras that it is all but impossible to time markets and that investors should be committed to a long-term growth strategy. “So, trust your portfolio and trust your advisor.”

In New Zealand, Forsyth Barr head of wealth management research Matt Henry agrees it is not the time to panic. “All the evidence shows us that those who don’t stick to their long term plan and who do react to market turmoil tend to do significantly worse over time.”

For the record, US$14 trillion was wiped off global equities last year. With bonds, the Bloomberg Global Aggregate index, a broad gauge of global fixed income assets, fell by more than 16% before rallying earlier this year. Meanwhile, in Australia and New Zealand, residential property markets experienced challenging years.Get back to basics

So, where do investors turn in 2023? In volatile markets, tried-and-tested investment strategies are perhaps more crucial than ever. Diversify across different asset classes, sectors and regions to reduce risks. Avoid making short-term decisions based on market ups and downs. Most importantly, seek professional advice.

Jonathan Philpot CA, a wealth management partner at HLB Mann Judd, does not endorse one-year investment forecasts because so many factors can change. “For example, this time last year no one saw the Russia–Ukraine war lasting and no one expected inflation to spike,” he says. “What I would say, though, is that if you have an investment time frame of less than three years, then that money should basically only be in term-deposit-type investments. It’s far too short a time frame.”

Pictured: Jonathan Philpot CA. Image credit: HLB Mann Judd

“If you have an investment time frame of less than three years, then that money should basically only be in term-deposit-type investments. It’s far too short a time frame.”

Looking further out, HLB Mann Judd sees long-term equities delivering returns of about 8% a year. With risk-free rates likely to sit at about 3% to 3.5%, Philpot says that still gives investors close to a 5% premium that they should expect if they back shares. “The equity markets, both international and Australian, look fine,” he says.

Long-term listed property rates should return 6% to 7%, while high-yielding credit investments are also looking “fairly attractive” based on HLB Mann Judd research.

Philpot says, significantly, fixed-interest investments are “finally getting a return” after a horror 10-year run. “Now you can park some money in a term deposit and get 4%, which is getting back to historically where it should be.”

Philip de Lisle CA, director of investment advisory consultancy Axiome in Auckland, also endorses disciplined long-term investing. Nevertheless, mid-2022 his firm adopted some calculated changes to portfolios on the back of central bank quantitative easing that has fuelled higher inflation. The duration risk of bonds within portfolios was reduced, while infrastructure has been positioned as a new asset class for clients, given its inflation-protection qualities.

“So, there have been some strategic, slow-moving changes in our advice to clients,” de Lisle says. “But I’d say our approach is like driving a passenger liner, not a sailboat – we’re not making short-term tacks.”

Pictured: Philip de Lisle CA. Image credit: Axiome

“I’d say our approach is like driving a passenger liner, not a sailboat – we’re not making short-term tacks.”

Beware of the red flags

At Zenith Investment Partners in Melbourne, head of asset allocation and strategy Damien Hennessy and his team are keenly watching asset classes that have “been hit quite hard” as a result of rising inflation and interest rates. These include credit, bonds, global and small-cap equities and emerging markets.

“Those parts of the market have made massive adjustments, so they’re areas we tend to be looking at a bit more favourably now,” he says.

In terms of more fraught short-term investments, Hennessy notes some of the big tech stocks in the US surged in January, but that rise was predicated mostly on falling bond yields. “The growth stocks are heavily dependent on declining interest rates for their valuation, so there’s a bit of a red flag in the respect that we don’t see bond yields really falling that much further from current levels.”

Hennessy advises investors to consider slight adjustments to portfolios to reflect better recent returns for defensive assets. “It’s really important to look for those areas where there is suddenly some decent value on offer.”

The biggest risk factor in the Australian market in the next year or two, according to Philpot, will be interest rates. More-than-expected rate rises could put pressure on residential property markets in Sydney and Melbourne in particular.

With variable mortgages predicted in some quarters to nudge 6%, Philpot fears there will be a dramatic decline in property markets if mortgagees cannot meet their repayments.

“That would cause a pretty significant slowdown in the economy and there will be a deeper recession than any of these so-called technical recessions that we may be going through today.”

In New Zealand, Henry is also closely observing interest rates. While the country is set to go to the polls in October, he thinks the domination of the market by defensive companies such as healthcare providers, utilities and telcos means that most eyes will be on rates rather than votes.

“People look at those assets as alternatives to putting money in the bank or buying bonds, so New Zealand is more interest-rate sensitive than most. So, it’s the direction of interest rates, which in turn is impacted by inflation, that will be the biggest driver of the New Zealand market in the next little while.”

De Lisle says higher inflation shapes as a key factor in New Zealand too because, in the short term, it adversely affects both real assets and financial assets. However, he is confident that corrections will roll through markets and again prove the value of equities. “Share market returns beat inflation over time and that can be evidenced statistically.”

As for cash, de Lisle says it is a “terrible investment in inflationary periods”.

Factoring in inflation

Expect high inflation to be a talking point in many markets in 2023. The International Monetary Fund forecasts global inflation to cool to 6.6% this year and 4.3% next year, which is still above pre-COVID-19 levels of about 3.5%.

The Reserve Bank of Australia’s (RBA) latest forecast is for trimmed mean inflation to fall to 6.25% by June 2023, before dropping to 4.75% by the end of next year. That represents some relief from a 32-year high of 7.8% in the final quarter of the fiscal year of 2022, but the new RBA figures remain a concern in a country that experienced a decade of inflation that was reliably below 3%.

Hennessy says “there’s a lot happening underneath the hood” with inflation in Australia, as supply-chain bottlenecks start to clear and manufacturing price pressures ease. However, he adds that labour market shortages and higher wages in the services sector could see inflation remain stubborn.

“The Reserve Bank hasn’t got inflation returning to the top end of the target band until 2025, so that’s a reasonable guide and what investors need to be thinking about.”

The US is heading for core inflation of 3.5% this year, according to the Federal Reserve, while in the United Kingdom the annual inflation rate fell from a peak of 11.1% in October to 10.5% in December, with the Bank of England expecting a sharp drop during the course of the year. Meanwhile, in China inflation has been trending below 3%.

In New Zealand, the Reserve Bank expects inflation to hit 7.5% in the first quarter of 2023 before starting to recede. Henry is reluctant to make predictions but expects inflation to “moderate considerably throughout this year.” Nevertheless, he says significant demand–supply imbalances in the domestic economy could have an impact, with a lack of new migrants coming to New Zealand post-COVID-19 putting pressure on labour markets.

“So, we do think New Zealand is facing stickier inflation than most other countries.”

Take advantage of safer bets

Henry sees fixed-income markets an opportunity to make gains, noting that not long ago the New Zealand bond index was yielding just 0.5%. Now, quality bonds are delivering 5% and 6% returns.

“While that doesn’t feel wonderful when inflation is something similar, these are multi-asset investments and we do expect to see inflation moderate this year,” he says. “So, over the medium term these are reasonable returns and much better than we’ve seen for a long time.”

Henry also regards equities as being in the “fair-value range”, but he adds that share assessments should be done on a company-by-company basis.

Philpot says that of all the asset classes, one that is on his firm’s radar is the international small-cap sector. “That’s an area where we think there’s some more value to be gained over the next few years, rather than the global larger-cap space. That’s really the only tactical change we’re making.”

Value market experience and expertise

Regardless of what happens in markets in 2023, de Lisle is convinced of the value of robust advice. While more market shocks and surprises will inevitably be around the corner, he says: “there’s more to be lost by hanging out of the market than being in the market”.

“Just make sure your asset allocation is appropriate for your circumstances,” he adds. In such fragile markets, Petritsch urges financial advisors to be transparent about their strategies with clients – and for investors to hold their nerve. Selling in a panic and locking in losses makes no sense.

“You don’t know what’s going to happen tomorrow but, over time, a well-planned portfolio should give you positive returns,” he says. “Investing can be a roller-coaster at times but strap yourself in and just go for the ride.”

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The crypto conundrum

Cryptocurrencies keep rising from the dead!

Despite the highly publicised bankruptcy of cryptocurrency exchange FTX and the associated 22% collapse of the price of bitcoin in just one day in early November last year, some crypto markets keep rallying. In January, for example, there was a 37% increase in investment in digital asset products.

This gave enthusiasts new hope after a washout in 2022, when rising interest rates triggered a wave of bankruptcies and price falls in crypto markets.

Well-known American crypto advocate and venture capital investor Tim Draper predicts the price of bitcoin could hit US$250,000 by mid-2023; in mid-February it was hovering at just around the US$30,000-plus mark. His confidence is based partly on what is called bitcoin ‘halving’, a process whereby rewards for mining bitcoins are cut in half. This reduces the number of bitcoins being generated, potentially driving up prices. The next halving is expected in mid-2024.

Others are not so enamoured with cryptocurrencies and bitcoin, with global bank Standard Chartered predicting bitcoin could fall to US$5000 levels in 2023. Meanwhile, Warren Buffett’s right-hand man Charlie Munger has described cryptocurrencies as a “gambling contract”, not a currency, and called for them to be banned.

All of this speculation underlines why many wealth managers do not rate cryptocurrencies when making allocations for their clients’ investment portfolios.

North Advisory’s Cayle Petritsch CA acknowledges crypto markets will continue to make plenty of noise, “but it’s a pretty big gamble and we don’t advise on those types of assets. You can come out a winner, but you have to weigh up the risks for those gains,” he says.

Axiome’s Philip de Lisle CA agrees, saying, “cryptocurrencies are inherently speculative.

“Some fortunes have been made and lost with crypto, but our job is to reduce volatility in client investments, so it doesn’t fit for us.”

Pictured: FTX founder Sam Bankman-Fried pleaded not guilty to charges he cheated investors on his cryptocurrency trading platform

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