The ASX share market has been through plenty of difficulties in 2022. But, 2023 could be just as interesting as 2022 for a number of reasons.
This year has seen direct COVID-19 impacts fade on some parts of the economy. For example, we're seeing travel demand rebound, which is helping ASX travel shares return to profitability.
But, in 2023, there could be a number of areas that could influence the ASX share market return.
With each area, it's very hard to say how things are going to land, so any predictions are just guesses.
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China COVID restrictions to ease?
The Asian superpower is still facing difficulties with COVID. It has been trying to restrict the transmission of the virus, even though other countries have adjusted their strategy.
However, some major Chinese cities have started to lift COVID curbs, such as Beijing and Shanghai, where people no longer need to present a negative COVID test to enter certain buildings. China is also working on vaccinating its older, more vulnerable citizens.
The lockdowns have limited economic activity, but a lifting of restrictions could mean more demand for some commodities. The iron ore price has already lifted in anticipation of more economic output in the country.
A lifting of Chinese restrictions could be a boost for ASX share market names like BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG).
Mixed outlook for oil
The Woodside Energy Group Ltd (ASX: WDS) share price has had a volatile time over the last 12 months.
It benefited enormously from higher energy prices after Russia invaded Ukraine. But, with the risk of the global economy tipping into a recession, oil demand could fall. The oil price is now essentially back to where it was at the start of the year even though the Ukraine conflict continues. But, if the Chinese economy fully reopens, could this be another boost for the oil price if oil demand from 1.4 billion people returns to normal?
I think the movements and direction of the oil price over 2023 could have important indirect impacts on the ASX share market – not just for Woodside shares, but many other parts of the market and economy as well.
Widespread inflation to fall?
A reduction in the oil price could help reduce the level of inflation. Not only would the oil price itself reduce inflation, but many other parts of the economy utilise energy for transportation, manufacturing and so on.
Inflation is exceptionally high at the moment, as noted by many central bankers. That's exactly why interest rates have been going higher – to reduce economic demand.
With supply chains hopefully returning to normal and some commodity prices being down, the inflation numbers could look a lot better. Remember, that doesn't necessarily mean that there will be an overall reduction in prices. A product going from $100 to $110 in one year is inflation of 10%, but then staying at $110 for the next year is inflation of 0%, even though the price remained high.
If inflation reduces, then central banks could stop their rate increases and this could be a boost for the ASX share market.
The 'real' economy
A lot of focus is going to be on how the 'real' economy performs in the coming months. How will households and businesses cope with the higher interest rates, as well as high prices because of inflation.
The retailers of Wesfarmers Ltd (ASX: WES), JB Hi-Fi Limited (ASX: JBH), Harvey Norman Holdings Limited (ASX: HVN), Premier Investments Limited (ASX: PMV) and so on, could see their sales impacted if things go south. But it may not be anywhere near as bad as some are fearing.
Other areas of the economy could also be affected by a downturn – construction could be an important one. The Housing Industry Association said that new home sales fell 23% over the three months to November, compared with the prior quarter, as reported by the Australian Financial Review.
It'll be interesting to see how this plays out for names like Stockland Corporation Ltd (ASX: SGP), Mirvac Group (ASX: MGR) and CSR Limited (ASX: CSR).
ASX growth shares to rebound?
With how much pain there has been for ASX growth shares during 2022, it will be interesting to see if there is a rebound for some share prices, even if economic conditions aren't looking great.
Share prices often move before the numbers show that things have gotten worse, or better.
I think it's quite possible that some of the ones that have fallen the hardest, like Xero Limited (ASX: XRO) and Temple & Webster Group Ltd (ASX: TPW), which are both down more than 50%, could see a bounce.
If Xero shares were to rise 20% from here – a return that I think would beat the ASX share market in 2023 – the Xero share price would only get back to $84, which would be back to September 2022 prices.
Interest rate-dependent businesses may not recover so much, because interest rates are unlikely to drop heavily over 2023 (in my opinion) because it could take some time for inflation to subside.
