After a terrible 2022, it's not entirely surprising that many investors are tentative about what to do for 2023.
How much worse will the Australian and global economies get? When will central banks stop raising interest rates? How badly will company earnings fare as the year wears on?
Are ASX shares a wise investment for 2023? Will they end the year higher or lower than now?
AMP Ltd (ASX: AMP) chief economist Dr Shane Oliver set out to explore the answers to these riddles.
First the bad news, then the good news
If you're fed up with the volatility we saw in 2022, unfortunately, the prominent economist reckons more will follow this year.
"2023 is likely to remain volatile and a retest of 2022 lows for shares is a high risk," Oliver said on the AMP blog.
"Economic growth will slow sharply this year thanks to rate hikes and cost of living pressures — with a high risk of recession in the US and Europe."
But the great news is that, if you can withstand the early volatility, sunshine could follow later in the year.
"Easing inflation, central banks getting off the brakes — with the RBA at or close to the peak on rates — economic growth likely stronger than feared and improved valuations should make for better returns."
Why will Australia fare better than most?
Why is Oliver optimistic?
One of the reasons is that long-term inflation expectations remain low.
"Inflation has likely peaked," he said.
"Labour market tightness is showing signs of easing which should take pressure [off] wages – this is flowing from slowing demand and in Australia will be helped by foreign workers returning."
He also feels like many central banks are closer to "peak hawkishness" and that Australia specifically will dodge a recession.
"A slump in consumer spending along with weaker global growth will see Australian growth slow to around 1.5% this year," said Oliver.
"The risk of recession is high, but it's likely to be avoided."
The Reserve Bank of Australia, in Oliver's opinion, is less "aggressive" and is not as likely to go overboard with rate hikes compared to other central banks.
Despite a slowing economy, Australian business investment outlook "remains solid".
"A rebound in Chinese growth is likely to support export volumes and prices," said Oliver.
"Chinese growth is expected to rebound to around 6% this year thanks to reopening providing an offset to weakness in other countries."
The Australian labour market will also see an easing of current staff shortages.
"Immigration is rebounding rapidly, which means more workers and support for economic growth."
For all these reasons, Oliver reckons ASX shares will outperform global stocks.
He's forecasting international shares will return around 7% this year, so Australian stocks will certainly end up much higher by the end of 2023.
"The anticipation of stronger growth in 2024 and improved valuations should make for better returns in 2023."
