No doubt plenty of ASX market watchers were happy to wave goodbye to a tumultuous 2022.
Last year saw political tensions heat up around the globe, particularly in Ukraine where tensions with Russia boiled over into war. Meanwhile, soaring inflation resulted in a string of interest rate hikes – a shock to the economy following a period of record low rates.
And as much as it pains me to say it, there might be more hurt to come for markets such as the ASX, with one top expert warning an earnings bubble is yet to break. Still, there's hope for strategic investors.
Here's what MFS Investment Management global investment strategist and portfolio manager Robert Almeida will be wary of, and what he is "wildly excited" about, in 2023.
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What might 2023 have in store for markets like the ASX?
Those invested in ASX shares, and stocks on other markets around the world, may want to heed caution this year.
Almeida warns that, while its possible inflation has peaked, the market doesn't seem to have priced in its impact on corporate profits. Rising inflation boosted companies' revenues last year. However, such benefits are likely temporary.
What's not temporary, though, are higher costs born from a tight labour market and more expensive debt, he says. Writing for MFS Investment Management last month, Almeida noted:
Profits are a function of revenues and costs. While revenues are likely to decelerate with the economy and inflation, costs typically don't recede as quickly and the earnings cycle ends.
In other words, as the expert told the Australian Financial Review, "the earnings bubble hasn't popped yet".
He is also doubtful that many companies can reduce costs as fast as they prophesy, potentially leading analysts to overestimate future earnings.
New year, new opportunities
Fortunately, the expert has also forecast a silver lining. Almeida is excited for upcoming stock picking opportunities.
He wrote companies with high costs, weak balance sheets, and lacking competitive edges are most at risk this year, continuing:
Conversely, while investors may find that even well-run companies have some, albeit small, level of margin reset, the opportunity to grow market share and take greater ownerships of profit pools will lead to even better operating performance over the long-term.
The coming inflation slowdown and margin recession will create a new and positive earnings cycle for enterprises with a demonstrable value proposition and an ability to out-earn their natural cost of capital. And I am wildly excited about that.
